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You are on page 1of 67

Patrick Bolton

Xavier Freixas

Leonardo Gambacorta

Paolo Emilio Mistrulli

Working Paper 19467

http://www.nber.org/papers/w19467

NATIONAL BUREAU OF ECONOMIC RESEARCH

1050 Massachusetts Avenue

Cambridge, MA 02138

September 2013

We would like to thank Claudio Borio, Mariassunta Giannetti, Roman Inderst, Natalya Martinova,

Lars Norden, Enrico Perotti, Joel Shapiro, Greg Udell and in particular two anonymous referees for

comments and suggestions. Support from 07 Ministerio de Ciencia e Innovacin, Generalitat de Catalunya,

Barcelona GSE, Ministerio de Economa y Competitividad) - ECO2008-03066, Banco de Espaa-Excelencia

en Educacin-"Intermediacin Financiera y Regulacin" is gratefully acknowledged. This study was

in part developed while Paolo Emilio Mistrulli was ESCB/IO expert in the Financial Research Division

at the European Central Bank. The views expressed herein are those of the authors and do not necessarily

reflect the views of the Bank of Italy, the Bank for International Settlements, or the National Bureau

of Economic Research.

NBER working papers are circulated for discussion and comment purposes. They have not been peer-

reviewed or been subject to the review by the NBER Board of Directors that accompanies official

NBER publications.

2013 by Patrick Bolton, Xavier Freixas, Leonardo Gambacorta, and Paolo Emilio Mistrulli. All

rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit

permission provided that full credit, including notice, is given to the source.

Relationship and Transaction Lending in a Crisis

Patrick Bolton, Xavier Freixas, Leonardo Gambacorta, and Paolo Emilio Mistrulli

NBER Working Paper No. 19467

September 2013

JEL No. G01,G21,G32

ABSTRACT

We study how relationship lending and transaction lending vary over the business cycle. We develop

a model in which relationship banks gather information on their borrowers, which allows them to provide

loans for profitable firms during a crisis. Due to the services they provide, operating costs of relationship-

banks are higher than those of transaction-banks. In our model, where relationship-banks compete

with transaction-banks, a key result is that relationship-banks charge a higher intermediation spread

in normal times, but offer continuation-lending at more favorable terms than transaction banks to profitable

firms in a crisis. Using detailed credit register information for Italian banks before and after the Lehman

Brothers' default, we are able to study how relationship and transaction-banks responded to the crisis

and we test existing theories of relationship banking. Our empirical analysis confirms the basic prediction

of the model that relationship banks charged a higher spread before the crisis, offered more favorable

continuation-lending terms in response to the crisis, and suffered fewer defaults, thus confirming the

informational advantage of relationship banking.

Patrick Bolton

Columbia Business School

804 Uris Hall

New York, NY 10027

and NBER

pb2208@columbia.edu

Xavier Freixas

Universitat Pompeu Fabra

Department of Economics and Business

Ramon Trias Fargas, 25-27

08005 Barcelona

Spain

xavier.freixas@upf.edu

Leonardo Gambacorta

Bank for International Settlements

Centralbanplatz, 2 4002 Basel

Switzerland

leonardo.gambacorta@bis.org

Paolo Emilio Mistrulli

Structural Economic Analysis Department

Bank of Italy

via Nazionale 91, 00184 Rome (IT)

paoloemilio.mistrulli@bancaditalia.it

1 Introduction

1

How do banks help their corporate borrowers through a crisis? Beyond pro-

viding loans to rms, commercial banks have long been thought to play a

larger role than simply screening loan applicants one transaction at a time.

By building a relationship with the rms they lend to, banks also play a

continuing role of managing rms nancial needs as they arise, whether in

response to new investment opportunities or to a crisis. What determines

whether a bank and a rm build a long-term relation, or whether they simply

engage in a market transaction? And, how do relationship and transaction

lending dier in a crisis? Our knowledge so far is still limited. To quote

Allen Berger, What we think we know about small versus large banks (...)

in small business lending may not be true and we know even less about them

during nancial crises.

2

We address these questions from both a theoretical

and empirical perspective.

Existing theories of relationship banking typically do not allow for aggre-

gate shocks and crises. Thus, we expand the relationship lending model of

Bolton and Freixas (2006) by introducing an aggregate shock along idiosyn-

cratic cash-ow risk for non-nancial corporations. In the expanded model

rms dier in their exposure to the aggregate shock and therefore may have

dierent demands for the nancial exibility provided by relationship bank-

ing. To be able to bring the model to the data we introduce a further critical

modication to the Bolton and Freixas model by allowing rms to borrow

from multiple banks on either a transaction or relationship basis.

3

1

We would like to thank Claudio Borio, Mariassunta Giannetti, Roman Inderst, Natalya

Martinova, Lars Norden, Enrico Perotti, Joel Shapiro, Greg Udell and in particular two

anonymous referees for comments and suggestions. The opinions expressed in this paper

are those of the authors only and do not necessarily reect those of the Bank of Italy or the

Bank for International Settlements. Support from 07 Ministerio de Ciencia e Innovacin,

Generalitat de Catalunya, Barcelona GSE, Ministerio de Economa y Competitividad) -

ECO2008-03066, Banco de Espaa-Excelencia en Educacin-Intermediacin Financiera

y Regulacin is gratefully acknowledged. This study was in part developed while Paolo

Emilio Mistrulli was ESCB/IO expert in the Financial Research Division at the European

Central Bank.

2

Keynote address, Indiana Review of Finance Conference, Dec. 2012.

3

The Bolton and Freixas (2006) model of relationship banking considers rms choice

of the optimal mix of nancing between a long-term banking relationship and funding

2

The main predictions from the theoretical analysis are: rst, that rms

will generally seek a mix of relationship lending (or, for short, 1banking)

and transaction lending (or 1banking); second, the rms relying on 1banks

are the ones that are more exposed to business-cycle risk and that have the

riskier cash ows. These rms are prepared to pay higher borrowing costs on

their relationship loans in normal times in order to secure better continuation

nancing terms in a crisis. Third, the rms relying on a banking relation are

better able to weather a crisis and are less likely to default than rms relying

only on transaction lending, even though the underlying cash ow risk of

rms borrowing from an 1bank is higher than that of rms relying only

on 1banking. Fourth, interest rates on 1loans are countercyclical: they

are higher than interest rates on 1loans in normal times and lower in crisis

times.

We test these predictions by looking at bank lending to rms in Italy be-

fore and after the Lehman Brothers default. Following Detragiache, Garella

and Guiso (2000), we use the extremely detailed credit registry information

on corporate lending by Italian banks, which allows us to track Italian rms

borrowing behavior before and after the crisis of 2008-09 at the individual

rm and bank level. The empirical analysis conrms the predictions of the

model. In particular, that relationship banks charged a higher spread before

the crisis, oered more favorable continuation-lending terms in response to

the crisis, and suered fewer defaults, thus conrming the informational and

nancial exibility advantage of relationship banking.

Our study is the rst to consider how relationship lending responds to

a crisis in a comprehensive way both from a theoretical and an empirical

perspective. Our sample covers loan contracts by a total of 179 Italian banks

to more than 72.000 rms over the time period ranging from 2007 to 2010,

with the collapse of Lehman Brothers marking the transition to the crisis.

The degree of detail of our data goes far beyond what has been available

in previous studies of relationship banking. For example, one of the most

important existing studies by Petersen and Rajan (1994) only has data on

rms balance sheets and on characteristics of their loans, without additional

through a corporate bond issue. Most rms in practice are too small to be able to tap

the corporate bond market, and the choice between issuing a corporate bond or borrowing

from a bank is not really relevant to them. However, as we know from Detragiache, Garella

and Guiso (2000) these rms do have a choice between multiple sources of bank lending

(see also Bolton and Scharfstein, 1996; Houston and James, 1996; Farinha and Santos,

2002).

3

specic information on the banks rms are borrowing from.

4

As a result

they cannot control for bank specic characteristics. We are able to do

so for both bank and rm characteristics, since we observe each bank-rm

relationship. More importantly, by focusing on multiple lender situations we

can run estimates with both bank and rm xed eects, thus controlling for

observable and unobservable supply and demand factors. We are therefore

able to precisely uncover the eects of bank-rm relationship characteristics

on lending. It turns out that our results dier signicantly depending on

whether we include or exclude these xed eects, revealing that the lack of

detailed information on each loan may lead to biases if, as one may expect, the

heterogeneity of banks (small, regional, large, mutuals,...) maps into dierent

lending behaviors that only bank xed eects can identify. Also, unlike the

vast majority of existing empirical studies, our database includes detailed

information on interest rates for each loan. This allows us to investigate

bank interest rate determination in good and bad times in a direct way,

without relying on any assumptions.

5

Overall, our study suggests that relationship banking plays an important

role in dampening the eects of negative shocks following a crisis. The rms

that rely on relationship banks are less likely to default on their loans and are

better able to withstand the crisis thanks to the more favorable continuation

lending terms they can get from 1banks. These ndings suggest that the

focus of Basel III on core capital and the introduction of countercyclical

capital buers could enhance the role of 1banks in crises and reduce the

risk of a major credit crunch especially for the rms that choose to rely on

4

They have a dummy variable taking the value 1 if the loan has been granted by a

bank and 0 if granted by another nancial institution, but they do not have information

on which bank has granted the loan and they do not have balance sheet information on

the bank.

5

In one related paper Gambacorta and Mistrulli (2013) investigate whether bank and

lender-borrower relationship characteristics had an impact on the transmission of the

Lehman default shock by analysing changes in bank lending rates over the period 2008:Q3-

2010:Q1. Bonaccorsi di Patti and Sette (2012) take a similar approach over the period

2007:Q2-2008:Q4, while Gobbi and Sette (2012) consider 2008:Q3-2009:Q3. Albertazzi

and Marchetti (2010) and De Mitri et al. (2010) complement the previous studies by

investigating the eect of the nancial crisis on |c:di:q qront/. In this paper, we focus

instead on the level of lending rates and the quantity of credit (instead than their respec-

tive changes). Moreover, we analyse the behaviour of relationship and transactional banks

by comparing bank prices and quantities both in normal times and in a crisis. Although

our results are not perfectly comparable, they are consistent with the above cited papers.

4

1banks.

Related Literature: Relationship banking can take dierent forms, and

most of the existing literature emphasizes benets from a long-term banking

relation to borrowers that are dierent from the nancial exiblity benets

that we model. The rst models on relationship banking portray the relation

between the bank and the rm in terms of an early phase during which

the bank acquires information about the borrower, and a later phase during

which it exploits its information monopoly position (Sharpe 1990). While

these rst-generation models provide an analytical framework describing how

the long-term relation between a bank and a rm might play out, they do

not consider a rms choice between transaction lending and relationship

banking, and which types of rms are likely to prefer one form of borrowing

over the other. They also do not allow for any rm bargaining power at

the default and renegotiation stage, as we do following Diamond and Rajan

(2000, 2001, and 2005).

The second-generation papers of relationship banking that consider this

question and that have been put to the data focus on three dierent and

interconnected roles for an 1bank: insurance, monitoring and screening.

A rst strand of studies focuses on the (implicit) insurance role of 1banks

against the risk of changes in future credit terms (Berger and Udell, 1992;

Berlin and Mester 1999); a second strand focuses on the monitoring role of

1banks (Holmstromand Tirole 1997, Boot and Thakor 2000, Hauswald and

Marquez 2000); and a third strand plays up the greater screening abilities of

new loan applications of 1banks due to their access to both hard and soft

information about the rm (Agarwal and Hauswald 2010, Puri et al. 2010).

Our theory is closest to a fourth strand which emphasizes the 1banks

ability to learn about changes in the borrowers creditworthiness, and to

adapt lending terms to the evolving circumstances the rm nds itself in

(Rajan, 1992 and Von Thadden, 1995). Interestingly, these four dierent

strands have somewhat dierent empirical predictions. Overall, our empirical

results suggest that only the predictions of the fourth strand of theories are

fully conrmed in our data. While all theories predict that 1banks have

lower loan delinquency rates than 1banks, only the fourth strand of theories

predicts that 1banks raise loan interest rates more than 1banks in crisis

times.

The structure of the paper is the following. In section 2 we describe the

theoretical model of 1banking and 1banking and in section 3 the com-

bination of the two forms of funding by rms. In section 4 we compare the

5

rms benets from pure 1banking with the ones of mixed nance, and the

implication for the capital buers the banks have to hold. In section 5 we

describe the database and we test the models predictions. Section 6 com-

pares our results with those derived by other types of theories of relationship

banking. The last section concludes.

2 The model

We consider the nancing choices of a rm that may be more or less ex-

posed to business-cycle risk. The rm may borrow from a bank oering

relationship-lending services, an 1bank, or from a bank oering only trans-

action services, a 1bank. As we explain in greater detail below, 1banks

have higher intermediation costs than 1banks, j

1

j

T

, because they have

to hold more equity capital against the expectation of more future roll-over

lending. We shall assume that the banking sector is competitive, at least

ex ante, before a rm is locked into a relationship with an 1bank. There-

fore, in equilibrium each bank just breaks even and makes zero supra-normal

prots. We consider in turn, 100% 1 bank lending, 100% 1bank lending,

and nally a combination of 1 and 1bank lending.

2.1 The Firms Investment and Financial Options

The rms manager-owners have no cash but have an investment project

that requires an initial outlay of 1 = 1 at date t = 0 to be obtained through

external funding. If the project is successful at time t = 1, it returns \

1

. If

it fails, it is either liquidated, in which case it produces \

1

at time t = 1,

or it is continued in which case the projects return depends on the rms

type, H or 1. For the sake of simplicity, we assume that the probability of

success of a rm is independent of its type. An Hrms expected second

period cash ow is \

1

, while it is zero for an 1rm. The probability that a

rm is successful at time t = 1 is observable, and the proportion of Hrms

is known. Moreover, both the probability of success and the proportion of

Hrms change with the business cycle, which we model simply as two

distinct states of the world: a good state for booms (o = G) and a bad state

for recessions (o = 1). Figure 1 illustrates the dierent possible returns of

the project depending on the banks decision to liquidate or to roll over the

6

unsuccessful rm at time t = 1.

6

We denote the rms probability of success at t = 1 as j

S

, with j

G

j

1

0. We further simplify our model by making the idiosyncratic high (\

1

) and

low (0) returns of rms at time t = 2 independent of the business cycle; only

the population of Hrms, which we denote by i

S

will be sensitive to the

business cycle. Finally, recession states (o = 1) occur with probability o

and boom states (o = G) occur with the complementary probability (1 o).

The prior probability (at time t = 0) that a rm is of type H is denoted

by i. This probability belief evolves to respectively i

1

in the recession state

and i

G

in the boom state at time t = 1, with i

1

< i

G

. The conditional

probability of a rm being of type H knowing it has defaulted in time t = 1

will be denoted by

i

(1 o)(1 j

G

)i

G

+o(1 j

1

)i

1

(1 j)

.

As in Bolton and Freixas (2006), we assume that the rms type is private

information at time t = 0 and that neither 1 nor 1 banks are able to identify

the rms type at t = 0. At time t = 1 however, 1banks are able to observe

the rms type perfectly by paying a monitoring cost : 0, while 1banks

continue to remain ignorant about the rms type (or future prospects).

Firms dier in the observable probability of success j = oj

1

+(1 o)j

G

.

For the sake of simplicity we take j

G

= j

1

+ and assume that j

G

is

uniformly distributed on the interval [. 1], so that j

1

is l [0. 1 ] and

j is l [(1 o). 1 o]. Note that for every j there is a unique pair

(j

1

. j

G

) so that all our variables are well dened.

Firms can choose to nance their project either through a transaction

bank or through a relationship bank (or a combination of transaction and re-

lationship loans). To keep the corporate nancing side of the model as simple

as possible, we do not allow rms to issue equity. The main distinguishing

features of the two forms of lending are the following:

6

A model with potentially innitely-lived rms subject to periodic cash-ow shocks

and that distinguishes between the value to the rm and to society of being identied as

an H-type, would be a better representation of actual phenomena. In a simplied way our

model can be reinterpreted so that the value of , takes already into account this long run

impact on the rms reputation. Still, a systematic analysis of intertemporal eects would

require tracking the balance sheets for both the rm and of two types of banks as state

variables of the respective value functions and would lead to an extremely complex model.

7

1. Transaction banking: a transaction loan species a gross repayment

:

T

(j) at t = 1. If the rm does not repay, the bank has the right to

liquidate the rm and obtains \

1

. But the bank can also oer to roll

over the rms debt against a promise to repay :

S

T

(j

S

) at time t = 2.

This promise :

S

T

(j

S

) must, of course, be lower than the rms expected

second period pledgeable cash ow, which is \

1

for an Hrm and

zero for an 1rm. Thus, if the transaction banks belief i

S

that it is

dealing with an Hrm is high enough, so that

:

S

T

(j

S

) i

S

\

1

.

the rm can continue to period t = 2 even when it is unable to repay

its debt :

T

(j) at t = 1. If the bank chooses not to roll over the rms

debt, it obtains the liquidation value of the rms assets \

1

at t = 1.

The market for transaction loans at time t = 1 is competitive and

since no bank has an informational advantage on the credit risk of the

rm the roll-over terms :

S

T

(j

S

) are set competitively. Consequently, if

gross interest rates are normalized to 1, competition in the 1banking

industry implies that

i

S

:

S

T

(j

S

) = :

T

(j). (1)

(when the project fails at time t = 1 the rm has no cash ow available

towards repayment of :

T

(j); it therefore must roll over the entire loan

to be able to continue to date t = 2).

For simplicity, we will assume that in the boom state an unsuccessful

rm will always be able to get a loan to roll over its debt :

T

(j):

:

T

(j)

i

G

\

1

. (2)

A sucient condition for this inequality to hold is that it is satised

for j

G

= .

7

By the same token, in a recession state rms with a high probability

of success will be able to roll over their debt :

T

(j) if i

1

is such that

:

T

(j)

i

1

\

1

. (3)

7

Note that the condition is not necessary as in equilibrium some rms with low j may

not be granted credit at time t = 0 anyway.

8

This will occur only for values of j

1

above some threshold j

1

for which

condition (3) holds with equality, a condition that, under our assump-

tions, is equivalent to j b j. where b j = j

1

+(1 o). In other words,

for low probabilities of success j < b j, an unsuccessful rm at t = 1

in the recession state will simply be liquidated, and the bank then re-

ceives \

1

, and for higher probabilities of success, j b j (or j

1

j

1

)

an unsuccessful rm at t = 1 in the recession state will be able to roll

over its debt. Figure 2 illustrates the dierent contingencies for the

case j

1

j

1

.

2. Relationship banking: Under relationship banking the bank incurs

a monitoring cost : 0 per unit of debt,

8

which allows the bank to

identify the type of the rm perfectly in period 1. A bank loan in period

0 species a repayment :

1

(j) in period 1 that has to compensate the

bank for its higher funding costs j

1

j

T

.

The higher cost of funding is due to the need of holding higher amounts

of capital that are required in anticipation of future roll-overs. It can

be shown, by an argument along the lines of Bolton and Freixas (2006),

that as the 1-banks are nancing riskier rms, even if, on average their

interest rates will cover the losses, they need additional capital. In ad-

dition 1-banks renance H-rms and they do so by supplying lending

to those rms that do not receive a roll-over from 1banks. As a con-

sequence, they also need more capital because of capital requirements

due to the expansion of lending to Hrms.

If the rm is unsuccessful at t = 1 the relationship bank will be able

to extend a loan to all the rms it has identied as Hrms and then

determines a second period repayment obligation of :

1

1

. As the bank

is the only one to know the rms type, there is a bilateral negotiation

over the terms :

1

1

between the rm and the bank. We let the rms

bargaining power be (1 ,) so that the outcome of this bargaining

process is :

1

1

= ,\

1

and the Hrms surplus from negotiations is

(1 ,)\

1

.

In sum, the basic dierence between transaction lending and relationship

8

Alternatively, the monitoring cost could be a xed cost per rm, and the cost would

be imposed on the proportion i of good rms in equilibrium. This alternative formulation

would not alter our results.

9

lending is that transaction banks have lower funding costs at time t = 0 but

at time t = 1 the rms debt may be rolled over at dilutive terms if the

transaction banks beliefs that it is facing an Hrm i

1

are too pessimistic.

Moreover, the riskiest rms with j < b j will not be able to roll over their

debts with a transaction bank in the recession state. Relationship banking

instead oers higher cost loans initially against greater roll-over security but

only for Hrms.

3 Equilibrium Funding

Our set up allow us to determine the structure of funding and interest rates

at time t = 1 and t = 2 under alternative combinations of transaction and

relationship loans. We will consider successively the cases of pure transaction

loans, pure relationship loans, and a combination of the two types of loans.

We assume for simplicity that the intermediation cost of dealing with a bank,

whether 1bank or 1bank is entirely capitalized in period 0 and reected

in the respective costs of funds, j

T

and j

1

. We will assume as in Bolton and

Freixas (2000, 2006) that Hrms move rst and 1rms second. The latter

have no choice but to imitate Hrms by pooling with them, for otherwise

they would perfectly reveal their type and receive no funding.

Transaction Banking: Suppose that the rmfunds itself entirely through

transaction loans. Then the following proposition characterizes equilibrium

interest rates and funding under transaction loans.

Proposition 1: Under 1banking, rms characterized by j b j are

never liquidated and pay an interest rate

:

S

T

=

1

i

S

on their rolled over loans.

For rms with j < b j there is no loan roll-over in recessions, and the

roll-over of debts in booms is granted at the equilibrium repayment promise:

:

G

T

=

1

i

G

.

10

The equilibrium lending terms in period 0 are then:

:

T

(j) = 1 +j

T

for j b j. (4)

:

T

(j) =

1 +j

T

o(1 j

1

)\

1

oj

1

+ 1 o

for j < b j.

Proof: See Appendix A.

Relationship Banking: Consider now the other polar case of exclu-

sive lending from an 1bank. The equilibrium interest rates and funding

dynamics are then given in the following proposition.

Proposition 2: Under relationship-banking there is always a debt roll-

over for Hrms at equilibrium terms

:

1

1

= ,\

1

.

The equilibrium repayment terms in period 0 are then given by:

:

1

(j) =

1 +j

1

(1 j)[(1 i)\

1

+i(1 :),\

1

]

oj

1

+ (1 o)j

G

. (5)

Proof: See Appendix A.

Combining 1 and 1banking: In the previous two cases of either

pure 1 banking or pure 1banking the structure of lending is independent

of the rms type. When we turn to the combination of 1 and 1banking,

the rms choice might signal their type. As mentioned this implies that the

1rms will have no choice but to mimick the Hrms.

Given that transaction loans are less costly (j

T

< j

1

) it makes sense for

a rm to rely as much as possible on lending by 1banks. However, there is

a limit on how much a rm can borrow from 1banks, if it wants to be able

to rely on the more ecient debt restructuring services of 1banks. The

limit comes from the existence of a debt overhang problem if the rms are

overindebt with 1banks.

To see this, let 1

1

and 1

T

denote the loans granted by respectively

1banks and by 1banks at t = 0, with 1

1

+1

T

= 1. Also, let :

1T

1

and :

1T

T

denote the corresponding repayment terms under each type of loan. When a

rm has multiple loans an immediate question arises: what is the seniority

11

structure of these loans? As is common in multiple bank lender situations,

we shall assume that 1bank loans and 1bank loans are pari passu in the

event of default. Under this assumption, the following proposition holds:

Proposition 3: The optimal loan structure for Hrms is to maxi-

mize the amount of transactional loans subject to satisfying the relationship

lenders incentive to roll over the loans at t = 1.

The rm borrows:

1

T

=

(j + (1 j)i)

,\

1

(1 :) \

1

1 +j

T

\

1

. (6)

in the form of a transaction loan, and (11

T

) from an 1bank at t = 0

at the following lending terms:

:

1T

T

=

(1 +j

T

) (1 j)(1 i)\

1

j + (1 j)i

. (7)

and,

:

1T

1

=

1

j

(1 +j

1

)

(1 j)\

1

(1 1

T

)

. (8)

At time t = 1 both transaction and relationship-loans issued by H rms

are rolled over by the 1-bank. Neither loan issued by an 1 rm is rolled

over.

Proof: See Appendix A.

As intuition suggests: i) pure relationship lending is dominated under our

assumptions; and ii) if the bank has access to securitization or other forms of

funding to obtain funds on the same terms as 1banks, then it can combine

the two.

Note nally that, as 1loans are less expensive, a relatively safe rm

(with a high j) may still be better o borrowing only from 1banks and

taking the risk that with a small probability it wont be restructured in

bad times. We turn to the choice of optimal mixed borrowing versus 100%

1nancing in the next section.

12

4 Optimal funding choice

When would a rm choose mixed nancing over 100% 1nancing? To

answer this question we need to consider the net benet to an Hrm from

choosing a combination of 1 and 1bank borrowing over 100% 1bank

borrowing. We will make the following plausible simplifying assumptions in

order to focus on the most interesting parameter region and limit the number

of dierent cases to consider:

Assumption A1: Both (j

1

j

T

) and : are small enough.

Assumption A2: ,\

1

\

1

is not too large so that it satises:

,\

1

\

1

< min

(

(1 +j

T

)[

(10)

i

+

0

i

1]

(1 [(1 o)i

G

+oi

1

])

.

o(1 j

1

)(\

1

\

1

)

(1 j)(1 i)

)

These two conditions essentially guarantee that relationship banking has

an advantage over transaction banking. For this to be true, it must be the

case that: First, the intermediation cost of relationship banks is not too large

relative to that of transaction banks. Assumption A1 guarantees that this is

the case. Second, the cost of rolling over a loan with the 1bank should not

be too high. This means that the 1bank should have a bounded ex post

information monopoly power. This is guaranteed by assumption A2.

To simplify notation and obtain relatively simple analytical expressions,

we shall also assume that \

1

(j)

i

that \

1

(j)

i

. as i

G

i

1

. so that the rms debts will be rolled over by

the 1bank in both boom and bust states of nature. Note that when this is

the case the transaction loan is perfectly safe, so that :

T

(j) = 1 + j

T

. as in

equation (4).

We denote by (j) =

T

(j)

1T

(j) the dierence in expected payos

for an Hrm from choosing 100% 1nancing over choosing a combination

of 1 and 1loans and establish the following proposition.

Proposition 4: Under assumptions A1 and A2, the equilibrium funding

in the economy will correspond to one of the three following congurations:

1. (j

min

) ((1 o)) 0: monitoring costs are excessively high

and all rms prefer 100% transactional banking.

13

2. (j

max

) (1o) 0 and (j

min

) ((1o)) < 0: Safe

rms choose pure 1banking and riskier rms choose a combination

of 1banking and 1-banking.

3. (j

max

) (1 o) < 0: all rms choose a combination of

1banking and 1banking.

Proof: See Appendix A.

We are primarily interested in the second case, where we have coexistence

of 100% 1banking by the safest rms along with other rms combining

1Banking and 1banking. Notice, that under assumptions A1 and A2, it

is possible to write

((1 o)) = (j

1

j

T

)(1 1

T

) + (1 (1 o))

i:,\

1

+o(1 +j

T

) + (1 (1 o))(1 i)(,\

1

\

1

)

(1 +j

T

)[

(1 o)(1 )

i

G

+

o

i

1

] (9)

and

(1 o) = (1 +j

1

) (j

1

j

T

)1

T

o

i(1 :),\

1

+ (1 i)\

1

(1 o)(1 +j

T

) +o,\

1

(1 +j

T

)[

o

i

1

]. (10)

Under assumption A1 (j

1

j

T

) and : are small, so that a sucient

condition to obtain (1 o) 0 is to have o suciently close to zero.

Indeed, then we have:

(1 o) (j

1

j

T

)(1 1

T

) 0

To summarize the testable hypotheses coming from our theoretical model

are the following:

14

1 1banks are better able than 1banks at learning rms type. In a

crisis, the rate of default on rms nanced through transaction loans

will be higher than the rate on rms nanced by 1banks.

2 1banks charge higher lending rates in good times on the loans they

roll over, but in bad times they lower rates to help their best clients

through the crisis. 1banks increase their supply of lending (relative

to 1banks) in bad times.

3 It exists a critical threshold for the probability of success in bad time j

1

such that for any j

1

j

1

rms prefer pure transactional banking and

for any j

1

< j

1

rms prefer to combine the maximum of transactional

banking and the minimal amount of relationship banking.

4 Banks need a capital buer to be used in order to preserve the lending

relationship in bad times. This implies that the capital buer of an

1bank (which makes additional loans to good rms in distress) will

have to be higher than the one of a 1bank. This is consistent with

1banks quoting higher interest rates in normal times.

5 Data and empirical ndings

We now turn to the empirical investigation of relationship banking over the

business cycle. A key test we are interested in is whether 1banks charge

higher lending rates in good times and lower rates in bad times to help their

best clients through the crisis, and, similarly, whether 1banks oer cheaper

loans in good times but roll over fewer loans in bad times. Another related

prediction from our theoretical analysis we test is whether we observe lower

delinquency rates in bad times for 1banks that roll over their loans. To

test these predictions, we proceed in two steps. First we analyze how rms

default probability in bad times is inuenced by the fact that the loan is

granted by an 1bank or a 1bank. Second, we analyze (and compare)

lending and bank interest rate setting in good times and bad times. Our

dataset comes from the Italian Credit Register (CR) maintained by the Bank

of Italy and other sources.

The rst challenge we face is to identify two separate periods that repre-

sent the two states of the world in the model. Our approach is to distinguish

and compare bank-rm relationships prior to and after the Lehman Brothers

15

default (in September 2008), the event typically used to mark the beginning

of the global nancial crisis in other studies (e.g. Schularick and Taylor,

2011).

Our unique dataset covers a signicant sample of Italian banks and rms.

There are at least four advantages in focusing on Italy. First, from Italys

perspective the global nancial crisis was largely an unexpected (exogenous)

event, which had a sizable impact especially on small and medium-sized

rms that are highly dependent on bank nancing. Second, although Italian

banks have been hit by the nancial crisis, systemic stability has not been

endangered and government intervention has been negligible in comparison

to other countries (Panetta et al. 2009). Third, multiple lending is a long-

standing characteristic of the bank-rm relationship in Italy (Foglia et al.

1998, Detragiache et al. 2000). And fourth, the detailed data available for

Italy allow us to test the main hypotheses of the theoretical model without

making strong assumptions. Mainly, the availability of data at the bank-rm

level on both quantity and prices allows us to overcome major identication

problems encountered by the existing bank-lending-channel literature in dis-

entangling loan demand from loan supply shifts (see e.g. Kashyap and Stein,

1995; 2000).

The visual inspection of bank lending and interest rate dynamics in Figure

3 helps us to select two periods that can be considered good and bad times:

We select the second quarter of 2007 as a good time-period when lending

reached a peak and the interest rate spread applied on credit lines levelled to

a minimum (see the green circles in panels (a) and (b) of Figure 3). We take

the bad time-period to be the rst quarter of 2010, which is characterized by

a contraction in bank lending to rms and a very high intermediation spread

(see the red circles in panels (a) and (b) of Figure 3). The selection of these

two time-periods is also consistent with alternative indicators such as real

GDP and stock market capitalization (see panel (c) in Figure 3). We do not

consider the time-period beyond 2011, as it is aected by the eects of the

European Sovereign debt crisis.

Our second challenge is to distinguish between 1banks and 1banks.

One of the distinguishing characteristics of 1banks in our theory and other

relationship-banking models (Boot 2000; Berger and Udell 2006) is that

1banks gather information about the rms they lend to on an ongoing

basis, to be able to provide the exible nancing their client rms value.

Thus, the measure of relationship banking we focus on is the informational

16

distance between lenders and borrowers.

9

The empirical banking literature

has established that greater geographical distance between a bank and a rm

aects the ability of the bank to gather soft information (that is, information

that is dicult to codify), which in turn undermines the banks ability to

act as a relationship lender (see Berger et al. 2005, Agarwal and Hauswald

2010).

The theoretical banking literature argues that greater geographical dis-

tance plausibly increases monitoring costs and diminishes the ability of banks

to gather and communicate soft information. In particular, it is argued that

loan ocers who are typically charged with gathering this kind of informa-

tion and to pass it through the banks hierarchical layers will face higher

costs.

10

Stein (2002) has shown that when the production of soft informa-

tion is decentralized, incentives to gather it crucially depends on the ability

of the agent to convey information to the principal. Cremer, Garicano and

Prat (2007) have also argued that distance may aect the transmission of

information within banks (i.e. the ability of branch loan ocers to harden

soft information), since bank headquarters may be less able to interpret the

information they receive from distant branch loan ocers than from closer

ones. They show that there is a trade-o between the eciency of commu-

nication and the breadth of activities covered by an organization, so that

communication is more dicult when headquarters and branches are farther

apart.

We therefore divide 1banks and 1banks by the geographical distance

between the lending banks headquarters and rm headquarters, which we

take as a simple proxy for informational distance.

11

More precisely, we in-

troduce two dummy variables: for an 1bank, the rst variable is equal

to 1 if rm / is headquartered in the same province where bank , has its

headquarters; for a 1bank, the second variable is equal to 1 when the rst

variable (for the 1bank) is equal to 0. This way a bank can act both as

9

There is not a clear consensus in the literature on the way relationship characteris-

tics are identied. In Appendix C, we have checked the robustness of the results using

alternative measures for relationship lending.

10

Soft information it is gathered through repeated interaction with the borrower and

then it requires proximity. Banks in order to save on transportation costs delegate the

production of soft information to branch loan ocers since they are those within bank

organizations which are the closest to borrowers. Alternatively, one can consider the

geographical distance between bank branches and rms headquarters. However, Degryse

and Ongena (2005) nd that this measure has little relation to informational asymmetries.

11

Accordingly, branches of foreign banks are treated as Tbanks.

17

an 1bank for a rm headquartered in the same province and as a 1bank

for rms that are far away.

Our third challenge is to measure credit risk and to distinguish this mea-

sure from asymmetric information. One basic assumption of our theoretical

framework is that ex ante all banks know that some rms are more risky

than others. The objective measure of a rms credit risk shared ex ante by

all banks is given by (1 j) in our model and by a rms 2score in our

empirical analysis. The 2score, thus, is our measure of a rms ex-ante

probability of default. The 2scores can be mapped into four levels of risk:

1) safe; 2) solvent; 3) vulnerable; and 4) risky. Measuring asymmetric infor-

mation and the role of relationship banks in gathering additional information

is more complex. Obviously, no contemporaneous variable could possibly re-

ect soft information that is private to the rm and the relationship bank.

Consequently, it is only ex post that a variable could reect the skills of re-

lationship banks in renancing the good rms and liquidating the bad ones.

Relationship banks superior soft information must imply that rms who are

able to roll over their loans from a relationship bank must on average have

lower rates of default. This is why in order to distinguish Hrms from

1rms we look at the realization of defaults.

Table 1 gives some basic information on the dataset after having dropped

outliers (for more information see the data Appendix B). The table is di-

vided horizontally into three panels: i) all rms, ii) Hrms (i.e. rms that

have not defaulted during the nancial crisis) and iii) 1rms (i.e. rms

that have defaulted on at least one of their loans). In the rows we divide

bank-rm relationships into: i) pure relationship lending: rms which have

business relationship with 1banks only; ii) mixed banking relationship:

rms which have business relationships with both 1banks and 1banks;

iii) pure transactional lending: rms which have business relationship with

1banks only.

Several clear patterns emerge. First, cases where rms have only relation-

ships with 1banks (10% of the cases) or 1banks (44% of the cases) are

numerous but the majority of rms borrow from both kinds of banks (46%).

Second, the percentage of defaulted rms that received lending only from

1banks is relatively high (64% of the total). Third, in the case of pure

1banking, or combined 11 banking, rms experience a lower increase

in the spread in the crisis. Fourth, 1banking is associated with a higher

level of bank equity-capital ratios, so that 1banks have a buer against

contingencies in bad times. Their equity-capital slack depends on the busi-

18

ness cycle and is depleted in bad times. Interestingly, the size of the average

1bank is four times that of the average 1bank (100 vs 25 billions). This

is in line with Stein (2002) who points out that the internal management

problem of very large intermediaries may induce these banks to rely solely

on hard information in order to align the incentives of the local managers

with headquarters.

These patterns are broadly in line with the predictions of our theoretical

model. However, these ndings can only be suggestive as the bank-lending

relationship is inuenced not only by rms types but also by other factors

(sectors of a rms activity, the rms age and location, bank-specic charac-

teristics, etc.), which we have not yet controlled for in the descriptive sample

statistics reported in Table 1.

5.1 Hypothesis 1: 1banks have better information

than 1banks about rms credit risk

To verify whether 1banks are better able to learn rms types than 1banks

we look at the relationship between the probability that a rm / defaults

and the rms relative share of transactional vs relationship nancing. If

1banks have superior information than 1banks in a crisis then the rate

of default of rms nanced through transaction loans will be higher than for

rms nanced by 1banks.

Our baseline cross-sectional equation estimates the marginal probability

of default of rm / in the six quarters that follow the Lehman Brothers

collapse (2008:q3-2010:q1) as a function of the share of loans of rm / from a

1bank in 2008:q2. In particular, we estimate the following marginal probit

model:

`1(Firm ks default=1) = c + +:(1 :/c:c)

I

+

I

(11)

where c and are, respectively, vectors of bank and industry-xed eects

and (1 :/c:c)

I

is the pre-crisis proportion of transactional loans (in value)

for rm /. The results reported in Table 2 indicate that a rm with more

1bank loans has a higher probability of default.

12

This marginal eect

12

In principle the reliability of this test may be biased by the possible presence of

evergreening, a practice aimed at postponing the reporting of losses on the balance

sheet. Albertazzi and Marchetti (2010) nd some evidence of evergreening practices

in Italy in the period 2008:Q3-2009:Q1, although limited to small banks. We think that

19

increases with the share of 1bank nancing and reaches a maximum of

around 0.3% when (1 :/c:c)

I

is equal to 1. This eect is not only sta-

tistically signicant but also important from an economic point of view, as

the average default rate for the whole sample in the period of investigation

was around 1%. This nding is robust to enriching the set of controls with

additional rm-specic characteristics (see panel II in Table 2) or to calcu-

lating the proportion of transactional loans in terms of the number of banks

that nance rm / instead of by the size of outstanding loans (see panel III

in Table 2).

5.2 Hypotheses 2: 2a) 1banks charge higher rates

in good times and lower rates in bad times. 2b)

1banks increase their supply of lending (relative

to 1banks) in bad times.

In the second step of our analysis we investigate bank lending and price set-

ting over the business cycle. Our focus on multiple lending relations at the

rm level allows us to solve potential identication issues, by including both

bank and rmxed eects in the econometric model. In particular, the inclu-

sion of xed eects allows us to control for all (observable and unobservable)

time-invariant bank and borrower characteristics, and to identify in a precise

way the eects of bank-rm relationships on the interest rate charged and

the loan amount.

We estimate two cross-sectional equations: one for the interest rate (:

),I

)

applied by bank , on the credit line of rm /, and the other for the logarithm

evergreening is less of a concern in our case for three reasons.

First, evergreening is a process that by nature cannot postpone the reporting of losses

for a too long time. In our paper, we consider the period 2008:Q3-2010:Q1 that is 18

months after Lehmanns default and therefore there is a higher probability that banks

have reported losses.

Second, there is no theoretical background to argue that evergreening can explain the

dierence we document between T-banks and 1-banks. Both kinds of banks may have

a similar incentive to postpone the reporting of losses to temporarily inate stock prices

and protability.

Third, in the case that 1-banks have more incentive to evergreen loans the denition of

default used in the paper limits the problem. In particular, we consider a rm as in default

when at least one of the loans extended is reported to the credit register as a defaulted

one (the ag is up when at least one bank reports the client as bad). This means that

a 1-bank cannot eectively postpone the loss simply because a T-banks will report it.

20

of outstanding loans by bank , in real terms (1

),I

) on total credit lines to

rm /:

:

),I

= i +, +1-bank

),I

+

),I

. (12)

1

),I

= o +c +j1-bank

),I

+

),I

. (13)

where i and o are bank-xed eects and , and c are rm-xed eects.

13

Both

equations are estimated over good times (2007:q2) and bad times (2010:q1).

The results are reported in Table 3.

14

In line with the predictions of the

model, the coecients show that 1banks (compared to 1banks) provide

loans at a cheaper rate in good times and at a higher rate in bad times (see

columns I and II). The dierence between the two coecients

1

G

=

.123 (.081) = .204

other things being equal, 1banks always provide on average a lower amount

of lending, especially in bad times (see columns III and IV). In this case

the dierence j

G

j

1

= .313 (.275) = 0.038

things being equal, 1banks increase their supply of loans in bad times. In

particular, they supply 4% more loans relatively to 1banks.

13

It is worth stressing that the analysis of interest rates applied on credit lines is partic-

ularly useful for our purposes for two reasons. First, these loans are highly standardized

among banks and therefore comparing the cost of credit among rms is not aected by

unobservable (to the econometrician) loan-contract-specic covenants. Second, overdraft

facilities are loans granted neither for some specic purpose, as is the case for mortgages,

nor on the basis of a specic transaction, as is the case for advances against trade credit

receivables. As a consequence, according to Berger and Udell (1995) the pricing of these

loans is highly associated with the borrower-lender relationship, thus providing us with a

better tool for testing the role of lending relationships in bank interest rate setting.

14

Following Albertazzi and Marchetti (2010) and Hale and Santos (2009) we cluster

standard errors (-

Vice versa in those regressions that include specic rm xed eects (but no bank xed

eects) we cluster standard errors at the bank group level. In this way we are able to

control for the fact that, due to the presence of an internal capital market, probably

nancial conditions of each bank in the group is not independent of one another. For a

general discussion on dierent approaches used to estimating standard errors in nance

panel data sets, see Petersen (2009).

21

5.3 Hypothesis 3: Safe rms prefer transactional lend-

ing; other rms prefer to combine transactional

and relationship banking.

A key prediction of our model is that rms with low underlying cash-ow

risk (those with a probability of success in bad times that is greater than j

1

)

prefer pure transaction banking, while those with higher cash-ow risk (with

j

1

j

1

) prefer to combine transaction and relationship banking. To test

this prediction we will look for a 2score relation such that rms with a low

2 score reveal their preference for pure transactional banking and those with

a high 2 score reveal their preference for combined 1 and 1banking. To

this end, equations (12) and (13) are further enriched with interaction terms

between bank-types and the 2score in order to explore whether 1banks

and 1banks behave dierently with respect to borrowers with a dierent

degree of risk:

:

),I

= i+o+(1bank)

),I

+

Z

(1bank)

),I

2+j

Z

(1bank)

),I

2+A+

),I

(14)

1

),I

= o+o+j1bank

),I

+j

Z

(1bank)

),I

2+

Z

(1bank)

),I

2+A+

),I

(15)

In the above equations we can include only bank xed eects, as the

interaction terms between bank type and 2scores (a linear combination

that is invariant for each rm) prevent us from including rm-xed eects.

For this reason we also enrich the set of controls by including a complete set of

industry-province dummies (o) and a vector A with a number of rm-specic

characteristics. In particular A now contains:

a dummy USGR that takes the value of 1 for those rms that have

used their credit lines for an amount greater than the value granted by

the bank, and zero elsewhere;

a dummy that takes the value of 1 if the rm is a limited liability

corporation, and zero elsewhere (LTD);

a dummy that takes the value of 1 for rms with less than 20 employees

(SMALL_FIRM), and zero elsewhere; this dummy aims to control for

the fact that small rms do not issue bonds as larger rms may do;

22

the length of the borrowers credit history (CREDIT HISTORY) mea-

sured by the number of years elapsed since the rst time a borrower

was reported to the Credit Register. This variable tells us how much

information has been shared among lenders through the Credit Register

over time and is a proxy for rms reputation acquisition.

The results are reported in Table 4. Firms that use their credit lines

for an amount greater than the value granted by the bank have to pay a

higher spread that increases in bad times. Repeated interaction with the

banking system also has an eect on bank interest rate setting and loan

supply. The variable CREDIT_HISTORY, representing the number of years

elapsed since the rst time a borrower was reported to the Credit Register, is

negatively (positively) correlated with rates applied to credit lines (amount

of outstanding loans). Firms organized as limited liability corporations (LTD

corporations) are less opaque and pay a lower spread. Other things being

equals, LTD corporations also need less bank lending because they have

access to other sources of funds.

The graphical representation of the interaction terms between bank-types

and the 2score is reported in Figure 4. The upper panels (a) and (b)

describes the eects on the interest rate, the bottom panels (c) and (d) those

on the logarithm of real loans. The graphs on the left illustrate the pre-

Lehman period, while those on the right represent the post-Lehman period.

In each graph the horizontal axis reports the 2score, where 2 goes from

1 (safe rm) to 4 (risky rm). Transaction banking (1banks) is indicated

with a dotted line and relationship banking (1banks) with a solid line.

The visual inspection of all graphs shows that both interest rates and

loan size are positively correlated with the 2score. The positive correlation

between risk and bank nancing probably reects the fact that risky rms

have a limited access to market nancing. As one would expect, the interest

rate increases with credit risk.

In line with the predictions of our model, the cost of credit of transactional

lending is always lower than relationship banking in good times: the dotted

line is always below the solid one for all 2scores (see panel (a) of Figure

4). This pattern is reversed in bad times (panel (b)) when banks with a

strong lending relationship (1banks) oer lower rates to :i:/ rms (those

with a 2score greater than 1). And, as predicted by our model, it is always

cheaper for safe rms to use transactional banking because they obtain always

a lower rate from 1banks. Moreover the two bottom panels of Figure 4

23

highlight that the roll-over eects of 1banks on lending is mostly present

for risky rms, while :c,c rms always obtain a greater level of nancing

from 1banks whether in good or bad times (the dotted line is always above

the solid line for 2 = 1 both in panel (c) and panel (d)).

5.4 Hypothesis 4: 1banks need capital buers to be

used to preserve the lending relationship in bad

times

A nal prediction of our model is that 1banks have a higher equity capital

buer than 1banks in good times so as to support the lending relationship

in bad times. To test this prediction we focus on bank capital endowments:

Since 1banks have a lower incentive of making additional loans to rms

in distress in bad times, we should observe that these banks hold a lower

equity-capital buer against contingencies relative to 1banks prior to the

crisis. In particular, we estimate the following cross-sectional equation on

our sample of 179 banks:

C1

)

= . +t(1 :/c:c)

)

+1 +2 +

)

. (16)

where the dependent variable C1

)

is the regulatory capital-to-risk-weighted-

assets of bank j in 2008:q2 (prior to the Lehman collapse), the variable

(1 :/c:c)

)

is the proportion of transaction loans (in value) for bank j, . is

a set of bank-zone dummies, 1 a set of bank-specic controls, and 2 a set of

bank credit portfolio-specic controls. Bank specic characteristics include

not only bank size and liquidity ratio (liquid assets over total assets), but also

the retail ratio between deposits and total bank funding (excluding capital).

All explanatory variables are taken in 2008:q1 in order to mitigate endogene-

ity problems. The results reported in Table 6 indicate that, indipendently

of the model specication chosen, a pure 1bank that has a credit portfolio

composed exclusively of transaction loans (1 :/c:c

)

= 1) have a capi-

tal buer more than 3 percentage points lower than a pure 1bank, whose

portfolio is composed exclusively of relationship loans (1 :/c:c

)

= 0).

Finally, we also test the eects of bank capital endowments on interest

rates and lending. We thus include in our baseline equations (12) and (13),

the regulatory capital-to-risk weighted assets ratio (C1, lagged one period

to mitigate endogeneity problems), a set of bank-zone dummies (.), and other

bank-specic controls (1 ):

24

:

),I

= , +. +(1 bank)

),I

+iC1

)

+1 +

),I

(17)

1

),I

= c +. +j(1 bank)

),I

+`C1

)

+1 +

),I

(18)

The vector 1 contains in particular the dummy lo G1, described above,

and:

a dummy for mutual banks (`l1l1), which are subject to a special

regulatory regime (Angelini et al., 1998);

a dummy equal to 1 if a bank belongs to a group and 0 elsewhere;

a dummy equal to 1 if a bank has received government assistance and

0 elsewhere.

The results reported in Table 5 indicate that banks with larger capital

ratios are better able to protect the lending relationship with their clients.

Well-capitalized banks have a higher capacity to insulate their credit portfolio

from the eects of an economic downturn by granting a higher amount of

lending at a lower interest rate. To get a sense of the economic impact of

the above-mentioned results, during a downturn a bank with a capital ratio 5

percentage points greater with respect to another one supplies 5% more loans

at an interest rate 20 basis points lower. This result on the eects of bank

capital is in line with the bank lending channel literature which indicates that

well-capitalized banks are better able to protect their clients in the event of a

monetary policy shock (Kishan and Opiela, 2000; Gambacorta and Mistrulli,

2004).

Interestingly, the positive eect of bank capital in protecting the lending

relationship is more important for 1banks than for 1banks. This can be

tested by replacing iC1 in equation (17) with

T

(1 /c:/) C1 +

1

(1 /c:/) C1

and `C1 in equation (18) with

`

T

(1 /c:/) C1 +`

1

(1 /c:/) C1.

In particular, the coecients

T

and

1

take the values of -0.054*** (s.e.

0.008) and -0.038*** (s.e. 0.010), respectively, and are statistically dierent.

25

A similar result is obtained in the lending equation, where `

T

and `

1

take

the values of -0.025*** (s.e. 0.005) and -0.006* (s.e. 0.003) respectively,

and are statistically dierent from one another. This means that during

a downturn an 1bank (resp. 1bank) with a capital ratio 5 percentage

points greater than another 1bank supplies 12% more loans at an interest

rate 27 basis points lower (resp. 3% more loans and 19 basis points lower

rates for a 1bank).

5.5 Robustness checks

We have checked the robustness of our results in several ways.

15

We have:

(1) included in the baseline regressions an additional measure of relationship

banking, namely a dummy for the main bank; (2) tested for alternative

denitions of the relationship dummy 1bank; (3) considered all foreign

banks as 1banks; (4) estimated equations on a subset of new rms. In

all cases results are very similar.

One distinctive feature of our dataset is that, by focusing on multiple

lending, we can run estimates with both bank and rm xed eects, thus

controlling for observable and unobservable supply and demand factors. In

this way we are able to clearly identify the eects of bank-rm relationship

characteristics on lending, not biased by the omission of some variables that

may aect credit conditions. To highlight this point we have re-run all the

models without bank and rm xed eects. The new set of results (not

reported for the sake of brevity but available from the authors upon request)

indicates that 1bank coecients are often dierent and may even change

sign in one third of the cases. In particular, when we do not introduce

xed-eects, 1banks are shown to supply relatively more lending but at

higher prices. This is an important observation, as it clearly shows that not

controlling for all unobservable bank and rm characteristics biases results;

in particular, the benets of relationship lending tend to be overestimated

on prices and underestimated on quantities.

The bias can be seen by comparing Figure 4 (illustrating the results of

the models with xed eects reported in Table 4) with Figure 5 (illustrating

results of the same models but without xed eects). In Figure 5 the dot-

ted line for 1banks moves upwards relative to Figure 4. In other words,

1banks supply relatively more loans and charge higher interest rates when

15

For more details see Appendix C.

26

xed eects are dropped compared with the case when they are added to the

estimated equation.

This last nding is consistent with the way we identify transaction and

relationship banking, as one would expect to see this sign for the bias if

1banks are better able than 1banks to gather soft information, and con-

sequently better able to discriminate good and bad borrowers. Indeed, con-

sider two rms that have the same 2score but one is, in reality, riskier than

the other. According to our model, 1banks are better able to discriminate

between the two while 1banks are not. This happens because 1banks

use only hard information (incorporated in the 2scores) while 1banks

rely on both hard and soft information. If this is true then the riskiest rm

would prefer to ask 1banks for a loan since these banks are less able to

distinguish good from bad borrowers. As a consequence, the riskiest rm

will in theory get better price conditions and a larger amount of credit com-

pared to the situation where 1banks are able to evaluate rms credit risk

correctly. Of course, 1banks are perfectly aware that the bank-rm match-

ing is not random and that their applicant pool is on average riskier than

that of 1banks. As a consequence, 1banks will charge higher interest

rates, anticipating that they will tend to make more mistakes in their loan

restructuring choices compared to 1banks. In other words, 1banks know

that they will tend to lend too much and this is exactly what we observe

in Figure 5, where we are not controlling for this endogenous matching. In

contrast, when we use xed eects we can control for the fact that bank-rm

matching is not random by comparing 1banks and 1banks behavior

keeping constant and homogenous the level of default risk between banks

types. It is only in this last situation that we are able to compare 1banks

with 1banks perfectly, since then the interest rate spread between these

two types of banks (and their dierent lending behavior) only reects their

dierent roles in the credit market. In sum, the interest spread between

1banks and 1banks in good times reported in Figure 4 (using xed ef-

fects) is an unbiased measure of the premium that rms pay in order to get

a loan restructuring in bad times.

27

6 Comparing dierent theories of relation-

ship banking

The relationship banking literature distinguishes between dierent benets

from a long-term banking relation. Except for Berlin and Mester (1999)

the other theories do not explicitly consider how relationship lending would

evolve over the business cycle. Nevertheless it is instructive to briey compare

our ndings with the likely predictions of the other main theories.

We have identied four dierent strands of relationship banking theories,

which dier in their predictions of default rates, cost of credit, and credit

availability over the business cycle. A rst strand emphasizes the role of

1Banks in providing (implicit) insurance to rms towards future access to

credit and future credit terms (Berger and Udell, 1992; Berlin and Mester

1999). According to this (implicit) insurance theory, 1banks do not have

better knowledge about rms types and therefore they should experience

similar default rates (in crisis times) to those of 1banks. Although Berlin

and Mester nd that banks funded more heavily with core deposits provide

more loan-rate smoothing in response to exogenous changes in aggregate, it

does not follow from this nding that the rms with the lowest credit risk

choose this loan-rate smoothing service.

A second strand underscores the monitoring role of 1banks (Holmstrom

and Tirole 1997, Boot and Thakor 2000, Hauswald and Marquez 2000). Ac-

cording to the monitoring theory, only rms with low equity capital choose

a monitored bank loan from an 1bank, while rms with sucient cash

(or collateral) choose cheaper loans from a 1bank. By this theory adverse

selection is a minor issue, and monitoring is simply a way to limit the rms

interim moral hazard problems. Although these monitoring theories do not

make any explict predictions on default rates in a crisis, it seems plausible

that these theories would predict higher probabilities of default in bad times

for rms borrowing from 1banks.

A third strand plays up the greater ex-ante screening abilities (of new

loan applications) of 1-banks due to their access to both hard and soft in-

formation about the rm (Agarwal and Hauswald 2010, Puri et al. 2010).

A plausible prediction of these ex-ante screening theories would seem to be

that 1banks have lower default rates in crisis times than 1banks. An-

other plausible prediction is that 1banks would benet from an ex-post

monopoly of information both in good and bad times, thus charging higher

28

lending rates than 1banks in both states on the loans they roll over.

A fourth strand of relationship banking theories, on which our model

builds, emphasizes (soft) information acquisition about borrowers types over

time. This role is closer to the one emphasized in the original contributions by

Sharpe (1990), Rajan(1992) and Von Thadden (1995). This strand of theories

puts the 1bank in the position of oering continuation lending terms that

are better adapted to the specic circumstances in which the rm may nd

itself in the future. This line of theories predicts that 1banks charge higher

lending rates in good times on the loans they roll over, and lower rates in

bad times to help their best clients through the crisis. In contrast, 1banks

oer cheaper loans in good times but roll over fewer loans in bad times. Also,

according to this theory we should observe lower delinquency rates in bad

times for 1banks that roll over their loans.

As a rst step in the comparison among these dierent theoretical models,

we focus on the relationship between the probability for a rm / to go into

default and the composition of its transactional vs relationship nancing.

From our test of Proposition 1 (see equation 11) we nd that 1banks

exhibit higher default rates in bad times. This nding is consistent with the

predictions of our theory as well the third strand of theories based on ex-ante

screening.

The comparison of interest rates of 1banks and 1banks in good times

and in bad times provides additional insights into the likely benets of re-

lationship banking. In particular, our ndings that 1banks charge higher

rates than 1banks in good times and vice-versa in bad times are only con-

sistent with the prediction of our theory. Importantly, we do not observe an

ex-post monopoly of information for 1banks such that 1banks always

charge higher rates than 1banks on the loans they roll over.

7 Conclusion

The theoretical approach we suggest, which emphasizes the idea that rela-

tionship lending allows banks to learn rms types and therefore help them

in bad types, provides predictions on relative rates of default in a crisis,

the behavior of interest rates, and the amount of equity capital of relation-

ship banks that the our data broadly supports. Our empirical analysis thus

provides further guidance on what relationship-lending achieves in the real

economy. We have found that relationship banking is an important mitigat-

29

ing factor of crises. By helping protable rms to retain access to credit in

times of crisis relationship banks dampen the eects of a credit crunch. How-

ever, the role relationship banks can play in a crisis is limited by the amount

of excess equity capital they are able to hold in anticipation of a crisis. Banks

entering the crisis with a larger equity capital cushion are able to perform

their relationship banking role more eectively. These results are consistent

with other empirical ndings for Italy (see, amongst others, Albertazzi and

Marchetti (2010) and Gobbi and Sette (2012)).

Our analysis suggests that if more rms could be induced to seek a long-

term banking relation, and if relationship banks could be induced to hold a

bigger equity capital buer in anticipation of a crisis, the eects of crises on

corporate investment and economic activity would be smaller. However, ag-

gressive competition by less well capitalized and lower-cost transaction banks

is undermining access to relationship banking. As these banks compete more

aggressively more rms will switch away from 1banks and take a chance

that they will not be exposed to a crisis. And the more rms switch the

higher the costs of 1banks. Overall, the ercer competition by 1banks

contributes to magnifying the amplitude of the business cycle and the pro-

cyclical eects of bank capital regulations.

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34

Appendix A. Mathematical proofs

Proof of Proposition 1

We shall characterize the equilibrium lending terms and loan renancing

using backwards induction. These lending terms and roll-over decisions will

depend on whether we are considering a safe rm for which condition (3)

holds (j b j) or a risky rm (j < b j).

If the project is successful, rms are able to repay their loan out of

their cash ow \

1

. This occurs with probability j

S

. In this case the

rm continues to period 2 and gets \

1

if it is an Hrm.

If the project fails at time t = 1, rms with j b j will be able to roll

over their debts. Their debt will then be rolled over against a promised

repayment of :

S

T

(j

S

) that reects state of nature o. When with j b j,

Hrms are able to make suciently high promised expected repay-

ments i

1

:

1

T

(j

1

) even in the recession state, so that for these rms we

have :

T

(j) given by the break-even condition:

:

T

(j) = 1 +j

T

.

If, instead j < b j, liquidation occurs in state 1 if the rm is not suc-

cessful, which happens with probability o(1 j

1

). The gross interest

rate :

T

(j) is then given by the break even condition:

[j + (1 o)(1 j

G

)] :

T

(j) +o(1 j

1

)\

1

= 1 +j

T

.

Proof of Proposition 2

Hrms are then able to secure new lending at gross interest rate :

1

1

=

,\

1

in both recession and boom states. Under these conditions, the rst

period gross interest rate :

1

(j) is given by the break-even condition:

j:

1

(j) + (1 j)[i(1 :),\

1

+ (1 i)\

1

] = 1 +j

1

.

where

16

i

(1 o)(1 j

G

)i

G

+o(1 j

1

)i

1

(1 j)

16

We assume again that the intermediation cost of dealing with an 1bank is entirely

capitalized in period 0.

35

Proof of Proposition 3

If 1banks have no incentive to roll over the rms joint debts of Hrms,

then the benets of combining the two types of debt are lost and the rm

would be better o with 100% 1bank nancing. Consequently, the combi-

nations of the two types of debt, 1

1

and 1

T

. is of interest only in so far as

the 1bank has an incentive to use its information to restructure the debts

of unsuccessful Hrms.

This means that combining both types of debts only makes sense if the

following constraint is satised:

,\

1

(1 :) :

1T

T

1

T

1

1

\

1

. (19)

The LHS represents what the 1bank obtains by rolling over all the period

t = 1 debts of an unsuccessful Hrm. When there is a combination of

1debt and 1debt, a roll-over requires not only that the 1bank extends

a new loan to allow the rm to repay :

1T

1

at t = 1, but also that it extends a

loan to allow the rm to repay :

1T

T

to the 1bank. As a result, the 1bank

can hope to get only ,\

1

(1 :) :

1T

T

1

T

by rolling over an unsuccessful

Hrms debts. This amount must be greater than what the 1bank can

get by liquidating the rm at t = 1. namely 1

1

\

1

.

1banks know that if they are lending to an Hrm their claim will

be paid back by the 1bank, provided the above condition (19) is met. So

they will obtain the par value, :

1T

T

for sure if they lend to an Hrm and a

fraction 1

T

of the residual value \

1

if, instead the rm is an 1rm. The

corresponding rate is therefore:

:

1T

T

=

(1 +j

T

) (1 j)(1 i)\

1

j + (1 j)i

. (20)

As intuition suggests, constraint (19) holds only if the amount of 1bank

debt the rm takes on is below some threshold. To establish this, note that

replacing 1

1

= 1 1

T

condition (19) can be rewritten as:

,(1 :)\

1

\

1

1

T

(:

1T

T

\

1

). (21)

Substituting for :

1T

T

we obtain that the following maximum amount of

transaction lending is consistent with ecient restructuring:

1

T

(1 +j

T

) (1 j)(1 i)\

1

j + (1 j)i

\

1

,\

1

(1 :) \

1

. (22)

36

which simplies to:

1

T

(1 +j

T

) \

1

j + (1 j)i

,\

1

(1 :) \

1

(23)

Implying that:

1

T

(j + (1 j)i)

,\

1

(1 :) \

1

1 +j

T

\

1

.

As the rm optimally chooses the amounts 1

T

and 1

1

. it will choose the

combination that maximizes

1T

, which is equivalent to minimizing the total

funding cost c

c = j :

1T

1

(j)(1 1

T

) +j :

1T

T

1

T

under the constraint (19) that guarantees that the 1bank has an incentive

to restructure Hrms.

The expression for c can be simplied by using the break even constraint

for the 1bank, which is given by:

j :

1T

1

(1 1

T

) + (24)

(1 j)

i((1 :),\

1

:

1T

T

1

T

) + (1 i)(1 1

T

)\

1

= (1 +j

1

)(1 1

T

)

or,

j :

1T

1

(1 1

T

) =

(1 +j

1

)(1 1

T

) (1 j)

i((1 :),\

1

:

1T

T

1

T

) + (1 i)(1 1

T

)\

1

Collecting terms in 1

T

on the right hand side we then get:

j :

1T

1

(1 1

T

) =

1

T

[(1 +j

1

) + (1 j)(i:

1T

T

+ (1 i)\

1

)] + (1 +j

1

) (25)

(1 j)

i(1 :),\

1

+ (1 i)\

1

Replacing j:

1T

1

(11

T

) by its value in (25) and ignoring constant factors

we thus obtain the equivalent funding cost minimization problem :

min

1

[(1 +j

1

) + ((1 j)i +j):

1T

T

+ (1 j)(1 i)\

1

)]1

T

37

But notice that the coecient

[(1 +j

1

) + ((1 j)i +j):

1T

T

+ (1 j)(1 i)\

1

)] 0

as :

1T

T

satises

((1 j)i +j):

1T

T

+ (1 j)(1 i)\

1

= 1 +j

T

and j

1

j

T

.

Consequently the condition (19) is always binding. This allows to replace

1

T

in (24) leading to:

j:

1T

1

(1 1

T

) + (1 j)\

1

= (1 +j

1

)(1 1

T

) (26)

thus obtaining the expression for :

1T

1

.

Proof of Proposition 4

Let =

T

1T

denote the dierence in expected payos for an

Hrm from choosing 100% 1nancing over mixed nancing, where

T

= j(2\

1

:

T

(j)) +(1o)(1j

G

)(\

1

:

T

(j)

i

G

) +o(1j

1

)(\

1

:

T

(j)

i

1

)

for j b j, where :

T

(j) = 1 +j

T

and

T

= j(2\

1

:

T

(j)) + (1 o)(1 j

G

)(\

1

:

T

(j)

i

G

)

for j < b j, where

:

T

(j) =

1 +j

T

o(1 j

1

)\

1

oj

1

+ 1 o

and,

1T

= j(2\

1

:

1T

1

(j)(1 1

T

) :

1T

T

(j)1

T

) + (1 j)(1 ,)\

1

Consider rst the case j b j

Combining these expressions can be written as follows:

(j) = j(:

1T

1

(j)(1 1

T

) +:

1T

T

(j)1

T

:

T

(j)) (27)

+(1 o)(1 j

G

)[,\

1

:

T

(j)

i

G

] +

+o(1 j

1

)(,\

1

:

T

(j)

i

1

)

38

The rst term,

j(:

1T

1

(1 1

T

) +:

1T

T

(j)1

T

) :

T

(j)).

reects the dierence in the costs of funding when the rm is successful,

which occurs with probability j. The other terms measure the dierence for

a non successful rm between the benets of relationship banking and those

of transactional banking.

To simplify the expression for (j) let

j[:

1T

1

(j)(1 1

T

) +:

1T

T

(j)1

T

]

From the break even condition (24) we then obtain that

= (1 +j

1

)(1 1

T

) + (1 j)i :

1T

T

(j)1

T

+j :

1T

T

(j)1

T

(1 j)

i(1 :),\

1

+ (1 i)(1 1

T

)\

1

Substituting for

:

1T

T

=

(1 +j

T

) (1 j)(1 i)\

1

j + (1 j)i

the above expression simplies to:

= (1+j

1

)(j

1

j

T

)1

T

(1j)

i(1 :),\

1

+ (1 i)(1 1

T

)\

1

(1j)(1i)1

T

\

1

(28)

Substituting for in (j) we obtain:

(j) = j :

T

(j) + (1 o)(1 j

G

)[(1 ,)\

1

:

T

(j)

i

G

] +

o(1 j

1

)

,)\

1

:

T

(j)

i

1

we obtain:

39

(j) = (1 +j

1

) (j

1

j

T

)1

T

(29)

(1 j)

i(1 :),\

1

+ (1 i)\

1

j(1 +j

T

) + (1 j),\

1

(1 +j

T

)[

(1 o)(1 j

G

)

i

G

+

o(1 j

1

)

i

1

]

Dierentiating with respect to j

1

and noting that

dj

G

dj

1

=

dj

dj

1

= 1

and that:

d1

T

dj

=

(1 i)

,\

1

(1 :) \

1

1 +j

T

d(j)

dj

1

= (j

1

j

T

)

d1

T

dj

1

d(1 j)i

dj

1

(1 :),\

1

\

1

(30)

+\

1

(1 +j

T

) ,

A

\

1

+(1 +j

T

)[

(1 o)

i

G

+

o

i

1

]

Using

d(1 j)i

dj

1

= [(1 o)i

G

+oi

1

]

and

d1

T

dj

1

=

(1 :),\

1

\

1

1 +j

T

(1 [(1 o)i

G

+oi

1

])

we further obtain:

40

d(j)

dj

1

= (j

1

j

T

)

(1 :),\

1

\

1

1 +j

T

(1 [(1 o)i

G

+oi

1

])(31)

+[(1 o)i

G

+oi

1

]

(1 :),\

1

\

1

+\

1

(1 +j

T

) ,\

1

+(1 +j

T

)[

(1 o)

i

G

+

o

i

1

]

Or, equivalently,

d(j)

dj

1

= (j

1

j

T

)

(1 :),\

1

\

1

1 +j

T

(1 [(1 o)i

G

+oi

1

])(32)

[(1 o)i

G

+oi

1

] :,\

1

(,\

1

\

1

)(1 [(1 o)i

G

+oi

1

])

+(1 +j

T

)[

(1 o)

i

G

+

o

i

1

1]

Now, under assumption A1 the rst two terms are negligeable, while

under assumption A2 the last two terms are positive, leading to

o(j)

oj

0 .

Next, consider the case j < b j.

Proceeding as before, can be written as follows:

(j) = j(:

1T

1

(j)(1 1

T

) +:

1T

T

(j)1

T

:

T

(j)) (33)

+(1 o)(1 j

G

)[,\

1

:

T

(j)

i

G

] +

o(1 j

1

)(1 ,)\

1

We will simply show that A1 and A2 are sucient conditions for (j) <

0

41

The rst term,

j(:

1

(j)(1 1

T

) +:

1T

T

(j)1

T

) :

T

(j)).

reects the dierence in the costs of repaying the loan when the rm is suc-

cessful, which occurs with probability j. The other terms measure the dif-

ference for a non successful rm between the benets of relationship banking

and those of transactional banking.

To simplify the expression for (j) let

j[:

1T

1

(j)(1 1

T

) +:

1T

T

(j)1

T

]

From the break even condition (24) we then obtain that

= (1 +j

1

)(1 1

T

) + (1 j)i:

1T

T

(j)1

T

+j :

1T

T

(j)1

T

(1 j)

i(1 :),\

1

+ (1 i)(1 1

T

)\

1

Substituting for

:

1T

T

=

(1 +j

T

) (1 j)(1 i)\

1

j + (1 j)i

the above expression simplies to:

= (1 +j

1

) (j

1

j

T

)1

T

(1 j)

i(1 :),\

1

+ (1 i)\

1

(34)

Substituting for in (j) we obtain:

(j) = j :

T

(j) + (1 o)(1 j

G

)[(,\

1

:

T

(j)

i

G

] +

o(1 j

1

)

(1 ,)\

1

As i

G

< 1. the expression j :

T

(j)+(1o)(1j

G

)

v

(j)

i

= :

T

(j) [j + (1 o)(1 j

G

)]

but j + (1 o)(1 j

G

) = oj

1

+ 1 o. so that replacing :

T

(j) we obtain

= 1 +j

T

o(1 j

1

)\

1

42

As a consequence, we obtain

(j) < + (1 o)(1 j

G

),\

1

+

o(1 j

1

)

(1 ,)\

1

(j) < (j

1

j

T

)(1 1

T

) (35)

(1 j)

i(1 :),\

1

+ (1 i)\

1

+ (1 j),\

1

+o(1 j

1

)\

1

o(1 j

1

)\

1

Rearranging terms this expression becomes:

(j) < (j

1

j

T

)(1 1

T

) + (1 j):,\

1

(36)

(1 j)

i,\

1

+ (1 i)\

1

+ (1 j),\

1

o(1 j

1

)(\

1

\

1

)

that is

(j) < (j

1

j

T

)(1 1

T

) + (1 j):,\

1

(37)

+(1 j)(1 i)

,\

1

\

1

o(1 j

1

)(\

1

\

1

)

Under A1 the rst two terms are small. Under A2

,\

1

\

1

is also

small so that the last term dominates and (j) < 0.

43

Appendix B. Technical details regarding the

data

We construct the database by matching four dierent sources.

i) The Credit Register (CR) containing detailed information on all

loan contracts granted to each borrower (i.e. the amount lent, the type of

loan contract, the tax code of the borrower).

ii) The Bank of Italy Loan Interest Rate Survey, including information

on interest rates charged on each loan reported to the CR and granted by

a sample of more than 200 Italian banks; this sample accounts for more

than 80% of loans to non-nancial rms and is highly representative of the

universe of Italian banks in terms of bank size, category and location. We

investigate overdraft facilities (credit lines) for three main reasons. First,

this kind of lending represents the main liquidity management tool for rms

especially the small ones (with fewer than 20 employees) that are prevalent

in Italy which cannot aord more sophisticated instruments. Second, since

these loans are highly standardized among banks, comparing the cost of

credit among rms is not aected by unobservable (to the econometrician)

loan-contract-specic covenants. Third, overdraft facilities are loans granted

neither for some specic purpose, as is the case for mortgages, nor on the

basis of a specic transaction, as is the case for advances against trade credit

receivables (Berger and Udell, 1995).

iii) The Supervisory Reports of the Bank of Italy, from which we ob-

tain the bank-specic characteristics (size, liquidity, capitalization, funding

structure). Importantly, for all the banks in the sample, we obtain informa-

tion on the credit concentration of the local credit market in June 2008. We

compute Herndahl indexes for each province (similar to counties in the US)

using the data on loans granted by banks.

iv) The CERVED database, which includes balance sheet information

on about 500,000 companies, mostly privately owned. Balance sheet data are

taken at t 1. This is important since credit decisions in t on how to set

rms interest rates on credit lines are based on balance sheet information

that has typically a lag.

17

We match these four sources obtaining a dataset of bank-rm lending re-

17

For more information, see http://www.cerved.com/xportal/web/eng/aboutCerved/aboutCerved.jsp.

The methodology for the calculation of the 7score, computed annually by CERVED, is

provided in Altman et al. (1994).

44

Table B1 Summary statistics

Zscorein2008:Q4 Obs.

Tbank

(1)

Credit

History

(2)

LTD

Log

Loans

Spread

2007:Q2

(3)

Spread

2010:Q1

(3)

1=Safe 4,045 0.68 10.92 0.991 7.48 3.81 5.38

2=Solvent 7,968 0.69 10.36 0.995 7.65 3.94 5.65

3=Vulnerable 67,614 0.71 10.33 0.981 7.89 4.39 6.33

4=Risky 106,697 0.72 9.35 0.963 7.91 4.88 7.33

Total 186,324 0.72 9.78 0.971 7.88 4.64 6.86

Note:(1)Shareofloansthatisgrantedbyabankthathasitsheadquarteroutsidethesameprovincewhere

thefirmhasitsheadquarter.(2)Numberofyearselapsedsincethefirsttimeaborrowerwasreportedto

theCreditregister.(2)Interestrateoncreditlinesminusonemonthinterbankrate.

lationships. In the paper we focus on multiple lending by selecting those rms

which have a credit line with at least two Italian banks in June 2008. This

limits the analysis to 216,000 observations. However, around 80% of Italian

non-nancial rms have multiple lending relationships, so this selection does

not limit our study from a macroeconomic point of view.

We clean outliers from the data, cutting the top and bottom fth per-

centile of the distribution of the dependent variables we use in the regression.

An observation has been dened as an outlier if it lies within the top or bot-

tom fth percentile of the distribution of the dependent variables (:

),I

and

1

),I

). After these steps our sample reduces to around 185,000 observations

(75,000 rms), which we use for the empirical analysis. The following table

gives some basic information on the main variables used in the regressions.

Appendix C. Robustness checks

We have checked the robustness of the results in several ways.

(1) Main bank. As there is not a clear consensus on the way rela-

tionship characteristics are identied, we have tested the robustness of the

results by including in the baseline regressions an additional measure of re-

lationship banking, namely a dummy for the main bank. This dummy

typically captures incentive to monitor eects or skin in the game ef-

fects. In particular, we have rst calculated the share of loans granted by

45

each bank to the rm and constructed two variables: i) the highest share

of lending granted by the main bank (`cr:/); ii) a dummy (`ci:) that

is equal to one if that bank grants the highest share of lending to the rm.

However, as in several cases many banks had a pretty low and similar share

of total lending, we have decided to consider as main bank only those -

nancial intermediaries that granted not only the highest share but also at

least one quarter of the total loans.

We have therefore modied equations (11)-(13) for the marginal probit

model, the interest rate (:

),I

) and outstanding loans in real terms (1

),I

) in

the following way:

`1(Firm ks default= 1) = c++:1:/c:c

I

+``cr:/

I

+i(1:/c:c

I

`cr:/

I

)+

I

(11)

:

),I

= i +,+1 /c:/

),I

+`ci:

),I

+t(1 /c:/

),I

`ci:

),I

)+

),I

(12)

1

),I

= o +c+j1 /c:/

),I

+t`ci:

),I

+o(1 /c:/

),I

`ci:

),I

)+

),I

(13)

where c, i and o are bank-xed eects, is a vector of industry xed eects,

, and c are rm-xed eects.

The results reported in Table C1.1 indicates that the highest the share

of loan granted to a rm the lower is the probability that the rm goes

into default. At the same time, the eect of transactional loans on default

probability is still in place and similar in magnitude with respect to that in

Table 3. In particular, the probability for a rm to go into default increases

with the share of 1bank nancing and reach the maximum of around 0.4%

when 1 :/c:c

I

is equal to 1. This result remains pretty stable by enriching

the set of controls with additional rm-specic characteristics (see panel II in

Table C1) or by calculating the proportion of transactional loans 1 :/c:c

I

not in value but in terms of the number of banks that nance rm k (see

panel III in Table C1).

The main results of our work remain also with respect to the two cross-

sectional equations (12) and (13). In line with the predictions of the model,

Table C2 indicates that 1banks (compared to 1banks) provide loans at

a cheaper rate in good time and at a higher rate in bad time (see columns

46

I and II). As for loan quantities, other things being equal, T-banks always

provide on average a lower amount of lending, especially in bad times (see

columns III and IV). Interestingly, we nd that a bank with a high share

of lending to a given rm tends to grant always lower interest rates and to

further reduce the cost of credit by more in time of crisis. However, we also

nd that the main bank reduce the amount of loans in a crisis. This nding

is consistent with the result in Gambacorta and Mistrulli (2013) and may

be interpreted as the eect of more bank risk aversion and a greater need to

diversify credit risk following the crisis.

(2) Region instead than province. One possible objection to the denition

used for the relationship dummy 1bank is that considering the bank and

the rm as "close" only if both have headquarter in the same province could

be too restrictive. For example, banks may be able to get soft information,

i.e. information that is dicult to codify, which is a crucial aspect of lending

relationships, also if they are headquartered inside the same region where the

rm has is main seat.

We have therefore replicated the results of Table 3 and Table 4 in the main

text by using a dierent denition for relationship and transaction banks. In

particular, the 1bank dummy is equal to 1 if rm / is headquartered in the

same region (instead than the province) where bank , has its headquarters;

1bank is equal to 1 if 1bank=0. Results reported in Tables C3 and C4

are very similar to those in the main text. Interestingly, the absolute values

of coecients are slightly reduced pointing to the fact that informational

asymmetries increase with functional distance.

(3) All foreign banks are T-banks. In the paper we divide 1banks and

1banks according to the distance between the lending bank headquarters

(at the single bank level, not at the group level) and rm headquarters.

This raises some questions for foreign banks (subsidiaries and branches of

foreign banks). Following this denition, branches of foreign banks are always

1banks. This classication is correct because lending strategic decisions are

typically taken by the banks headquarter located outside Italy.

However, these loans have not a big weigh in the database and represent

only 0.04% of the cases. On the contrary, subsidiaries of foreign banks are

treated as the Italian banks. This hypothesis seems plausible as these banks

have legal autonomy and are subject to Italian regulation. However, to test

the robustness of the results we have therefore replicated the estimations

reported in Table 3 and Table 4 by imposing that all foreign bank head-

quartered in Italy and with legal autonomy (around 7% of observations) are

47

1banks. This means that the 1bank dummy is equal to 1 if rm / is

not headquartered in the same province where bank , has its headquarters

or bank , is a foreign bank; 1bank is equal to 1 if 1bank= 0. Even in

this robustness test results are very similar to the baseline case (see Tables

C5 and C6).

(4) New rms. One of the main hypothesis of the model is that at t = 0

no bank can distinguish rms type. To make the empirical part closer to the

theoretical onet we have therefore estimated equations (11)-(13) on a subset

of around 6,000 new rms, that entered the credit register in the period

2005:Q2:2007:Q2. The results are qualitatively very similar to that obtained

from the baseline equations (see Tables C7 and C8).

48

49

Figure 1

Average firm cash flows in state S

Figure 2

100% Transactional Banks Payoff

50

Figure 3

Bank lending, interest rates and the business cycle in Italy

(a) Bank lending to the private sector

1, 2

5

0

5

10

15

20

2003 2004 2005 2006 2007 2008 2009 2010

Medium and large non-financial firms

Small non-financial firms

Households

(b) Interest rate on overdraft and interbank rate

1, 3

0

2

4

6

8

2003 2004 2005 2006 2007 2008 2009 2010

Interest on overdrafts (a)

3-month interbank rate (b)

Spread (a) - (b)

(c) Real GDP and stock market capitalization

4, 5

750

1,000

1,250

1,500

1,750

2,000

2,250

345

350

355

360

365

370

375

2003 2004 2005 2006 2007 2008 2009 2010

Real GDP (right axis)

Stock market capitalization

Notes. The vertical line indicates Lehmans default.

1

Monthly data.

2

Annual growth rates. Bad loans are

excluded. The series are corrected for the impact of securitization activity.

3

Percentage points. Current

account overdrafts are expressed in euro.

4

Quarterly data.

5

Real GDP in billions of euro. Stock market

capitalization refers to the COMIT Globale Index, 31 Dec. 1972 = 100.

Sources: Bank of Italy; Bloomberg.

51

Figure 4

Lending supply and interest rate setting by banks type and state of the world

1

(a1) Interest rate: good times (2007:q2) (a2) Interest rate: bad times (2010:q1)

(b1) Lending: good times (2007:q2) (b2) Lending: bad times (2010:q1)

1

This figure reports a graphical representation of the results in Table 5. The horizontal axis of each graph reports the Z-score,

an indicator of the probability of default of firms. These scores can be mapped into four levels of risk: 1) safe; 2) solvent; 3)

vulnerable; 4) risky. The vertical axis of graphs (a1) and (a2) indicate the level of the interest rate applied by the two bank types

on credit lines to the 4 different kinds of firms; those of graphs (b1) and (b2) report the log of lending in real terms supplied by

the two bank types.

52

Figure 5

Graphical analysis of the results in Table 5 without fixed effects

1

(a1) Interest rate: good times (2007:q2) (a2) Interest rate: bad times (2010:q1)

(b1) Lending: good times (2007:q2) (b2) Lending: bad times (2010:q1)

1

This figure reports a graphical representation of the results obtained re-running the same models reported in Table 5 without

fixed effects. The horizontal axis of each graph reports the Z-score, an indicator of the probability of default of firms. These

scores can be mapped into four levels of risk: 1) safe; 2) solvent; 3) vulnerable; 4) risky. The vertical axis of graphs (a1) and

(a2) indicate the level of the interest rate applied by the two bank types on credit lines to the 4 different kinds of firms; those of

graphs (b1) and (b2) report the log of lending in real terms supplied by the two bank types.

53

Table 1 Descriptive statistics. Bank-firm relationship

Bank-firm loan types

Obs.

%

Spread

good time

(2007:q2)

(a)

Spread

bad time

(2010:q1)

(b)

(b) -(a)

Log Loans

good time

(2007:q2)

(c )

Log Loans

bad time

(2010:q1)

(d)

(d) -(c)

Capital to

asset ratio

(2007:q2)

(e)

Capital to

asset ratio

(2010:q1)

(f)

(f)-(e)

ALL FIRMS

i) Relationship only 18693 10.1% 4.3 6.2 1.9 7.74 7.73 -0.011 9.103 8.794 -0.31

ii) Both types 84598 45.8% 4.5 6.7 2.2 7.96 8.00 0.036 8.843 8.743 -0.10

iii) Transactional only 81604 44.1% 4.8 7.1 2.3 7.78 7.81 0.029 8.547 8.793 0.25

Total 184895 100.0% 4.6 6.8 2.2 7.86 7.89 0.028 8.739 8.770 0.03

H-FIRMS

i) Relationship only 18489 10.1% 4.2 6.2 1.9 7.74 7.73 -0.006 9.096 8.79 -0.30

ii) Both types 84129 45.9% 4.5 6.7 2.2 7.95 7.99 0.039 8.543 8.56 0.02

iii) Transactional only 80493 44.0% 4.8 7.1 2.3 7.77 7.80 0.032 8.842 8.79 -0.05

Total 183111 100.0% 4.6 6.8 2.2 7.85 7.88 0.031 8.730 8.69 -0.04

L-FIRMS

i) Relationship only 206 11.6% 6.0 9.0 3.0 8.07 7.90 -0.169 8.98 8.70 -0.28

ii) Both types 439 24.6% 5.9 9.4 3.5 8.54 8.33 -0.207 8.949 9.04 0.09

iii) Transactional only 1139 63.8% 6.3 9.7 3.5 8.17 8.06 -0.113 8.648 8.88 0.24

Total 1784 100.0% 6.2 9.6 3.4 8.25 8.11 -0.143 8.760 8.90 0.14

Note: L-Firms are those that went into default in the period 2008:q3-2010:q1, H-Firms are the remaining ones.

54

Table 2 Effect of Bank-firm relationship on the marginal probability of a firms default

Dependent variable: P(default

k

=1)

(I)

Baseline

equation

(II)

Firm specific

characteristics

(III)

Alternative

Weight

Coef. Sig. Coef. Sig. Coef. Sig.

T-share (in value) 0.0032 *** 0.0029 ***

(0.0008) (0.0007)

T-share (number of banks) 0.0028 ***

(0.0007)

(0.0005) (0.0001)

LTD -0.0002 -0.0002

(0.0018) (0.0018)

Small firm -0.0021 -0.0021

(0.0034) (0.0034)

CREDIT_HISTORY -0.0002 *** -0.0001 ***

(0.0000) (0.0000)

Bank fixed effects Yes Yes Yes

Industry-province dummies Yes Yes Yes

Number of obs. 72,489 72,489 72,489

Pseudo R

2

0.1273 0.1395 0.1397

The models estimate the marginal probability for a firm k to go into default in the period 2008:q3-

2010:q1. All explanatory variables are evaluated at 2008:q2, prior Lehman's default. The variable

T- Share indicates the proportion of loans that firm k has borrowed from a transactional bank. We

report the share both in loan value and in terms of number of T-banks. Parameter estimates are

reported with robust standard errors in brackets (cluster at individual bank level). The symbols *,

**, and *** represent significance levels of 10%, 5%, and 1% respectively. Coefficients for

industry-province dummies and bank fixed effects are not reported.

55

Table 3 T-banking and R-banking in good times and bad times

Variables

Interest rate

good time

(2007:q2)

(I)

Interest rate

bad time

(2010:q1)

(II)

Log Loans

good time

(2007:q2)

(III)

Log Loans

bad time

(2010:q1)

(IV)

T-Bank -0.0805*** 0.1227*** -0.2753*** -0.3129***

(0.0174) (0.0210) (0.0123) (0.0110)

Bank fixed effects yes yes yes yes

Firm fixed effects yes yes yes yes

Number of obs. 184,859 184,859 184,859 184,859

Adjusted R-squared 0.529 0.585 0.426 0.473

Notes: The models in column (I) and (III) are estimated in 2007:q2; those in columns (II) and (IV) in

2010:q1. The dummy T-Bank takes the value of 1 if the loan is granted by a transactional bank. The

coefficients represent the difference relative to relationship banking (R-banks). Parameter estimates

are reported with robust standard errors in brackets (cluster at individual firm level). The symbols *,

**, and *** represent significance levels of 10%, 5%, and 1% respectively. Coefficients for fixed

effects are not reported.

56

Table 4 Comparing T-banking, R-banking and firms quality

Variables

Interest rate

good time

(2007:q2)

(I)

Interest rate

bad time

(2010:q1)

(II)

Log Loans

good time

(2007:q2)

(III)

Log Loans

bad time

(2010:q1)

(IV)

T-Bank -0.3309*** -0.3977*** 0.0795* 0.1023**

(0.0604) (0.0737) (0.0393) (0.0413)

R-Bank*Z 0.3479*** 0.5016*** 0.1036*** 0.1329***

(0.0148) (0.0178) (0.0115) (0.0096)

T-Bank*Z 0.4238*** 0.7076*** 0.0575*** 0.0577***

(0.0119) (0.0151) (0.0092) (0.0062)

US>GR 0.8825*** 1.5181*** 0.6887*** 0.5667***

(0.0193) (0.0192) (0.0093) (0.0075)

LTD -0.3697*** -0.3760*** -0.0603* -0.0796***

(0.0453) (0.0561) (0.0330) (0.0213)

Small firm -0.0854 0.2037 -0.3993*** -0.4688***

(0.2295) (0.2463) (0.0968) (0.0784)

CREDIT_HISTORY -0.0475*** -0.0619*** 0.0460*** 0.0404***

(0.0020) (0.0023) (0.0013) (0.0009)

Bank fixed effects yes yes yes yes

Firm fixed effects no no no no

Industry-province dummies yes yes yes yes

Number of obs. 184,859 184,859 184,859 184,859

Adjusted R-squared 0.1776 0.2065 0.0865 0.0857

Notes: The models in column (I) and (III) are estimated in 2007:q2; those in columns (II) and

(IV) in 2010:q1. The dummy T-Bank takes the value of 1 if the loan is granted by a transactional

bank. The coefficients represent the difference relative to relationship banking (R-banks).

Parameter estimates are reported with robust standard errors in brackets (cluster at individual

bank level). The symbols *, **, and *** represent significance levels of 10%, 5%, and 1%

respectively. Coefficients for industry-province dummies and fixed effects are not reported.

57

Table 5 Capital endowment and bank type

Variables

Baseline

model

(I)

Bank-specific

characteristics

(II)

Firm-specific

characteristics

(III)

Financially

constrained

firms

(IV)

T-share -3.839*** -3.276** -3.091** -3.203**

(0.890) (1.301) (1.267) (1.265)

Bank size -0.040 0.090 0.092

(0.280) (0.268) (0.264)

Bank liquidity ratio -0.009 -0.011 -0.003

(0.016) (0.019) (0.017)

Retail ratio 0.049*** 0.031* 0.029*

(0.017) (0.017) (0.017)

Proportion of small firms in the

banks credit portfolio 6.169 5.972

(4.248) (4.115)

Proportion of LTD firms in the

banks credit portfolio -2.422 -2.141

(3.723) (3.712)

Average Z-score of the banks

credit portfolio -1.611 -1.337

(2.468) (2.563)

Proportion of financially

constrained firms (US>GR) 5.392

(6.603)

Bank zone dummies yes yes yes yes

Number of obs. 179 179 179 179

Adjusted R-squared 0.130 0.185 0.217 0.218

Notes: The dependent variable is the regulatory capital/risk-weighted asset ratio at 2008:q2 prior

to Lehmans default. The variable T-share represents the proportion of transactional loans (in

value) for bank j. It takes the value from 0 (pure R-bank) to 1 (pure T-bank). All bank-specific

characteristics and credit portfolio characteristic are at 2008:q1. Parameter estimates are reported

with robust standard errors in brackets (cluster at individual bank level). The symbols *, **, and

*** represent significance levels of 10%, 5%, and 1% respectively. Coefficients for bank zone

dummies are not reported.

58

Table 6 Lending relationship and bank-capital

Variables

Interest rate

good time

(2007:q2)

(I)

Interest rate

bad time

(2010:q1)

(II)

Log Loans

good time

(2007:q2)

(III)

Log Loans

bad time

(2010:q1)

(IV)

T-Bank -0.0792** 0.1940** -0.1625*** -0.2208***

(0.0402) (0.0734) (0.0282) (0.0289)

CAP 0.0096 -0.0426*** -0.0112 0.0113**

(0.0185) (0.0123) (0.0086) (0.0052)

US>GR 0.1881*** 0.1611*** 0.5315*** 0.1403***

(0.0228) (0.0430) (0.0174) (0.0193)

MUTUAL -0.7812*** -1.0057*** 0.0573 0.0569

(0.1284) (0.1066) (0.0378) (0.0523)

Bank group and rescue dummies yes yes yes yes

Bank zone dummies yes yes yes yes

Firm fixed effects yes yes yes yes

Number of obs. 184,859 184,859 184,859 184,859

Adjusted R-squared 0.4856 0.5433 0.4161 0.4530

Notes: The models in column (I) and (III) are estimated in 2007:q2; those in columns (II) and (IV) in

2010:q1. The dummy T-Bank takes the value of 1 if the loan is granted by a transactional bank. The

coefficients represent the difference relative to relationship banking (R-banks). Parameter estimates are

reported with robust standard errors in brackets (cluster at individual bank group level). The symbols *, **,

and *** represent significance levels of 10%, 5%, and 1% respectively. Coefficients for dummies and firm

fixed effects are not reported.

59

Table C1 Effect of Bank-firm relationship on the marginal probability of a firms

default. Including Main bank dummy and its interaction with T-share.

Dependent variable: P(default

k

=1)

(I)

Baseline equation

(II)

Firm specific

characteristics

(III)

Alternative

Weight

Coef. Sig. Coef. Sig. Coef. Sig.

T-share (in value) 0.0042 *** 0.0036 ***

(0.0011) (0.0009)

T-share (number of banks) 0.0036 ***

(0.0015)

Maxsh

-0.0123 *** -0.0108 *** -0.0106 ***

Maxsh*T-share(in value) -0.0041 * -0.0033 *

(0.0023) (0.0019)

Maxsh*T-share(number of banks) -0.0035 *

(0.0020)

(0.0004) (0.0004)

LTD -0.0006 -0.0006

(0.0017) (0.0017)

Small firm -0.0020 -0.0020

(0.0032) (0.0032)

CREDIT_HISTORY -0.0002 *** -0.0002 ***

(0.0001) (0.0001)

Bank fixed effects Yes Yes Yes

Industry-province dummies Yes Yes Yes

Number of obs. 72,489 72,489 72,489

Pseudo R

2

0.0782 0.1190 0.1190

The models estimate the marginal probability for a firm k to go into default in the period 2008:q3-

2010:q1. All explanatory variables are evaluated at 2008:q2, prior Lehman's default. The variable T-

Share indicates the proportion of loans that firm k has borrowed from a transactional bank. We report

the share both in loan value and in terms of number of T-banks. The variable Maxsh indicates the

highest share of lending that is granted by the main bank. Parameter estimates are reported with robust

standard errors in brackets (cluster at individual bank level). The symbols *, **, and *** represent

significance levels of 10%, 5%, and 1% respectively. Coefficients for industry-province dummies and

bank fixed effects are not reported.

60

Table C2 T-banking and R-banking in good times and bad times. Including Main bank

dummy and its interaction with T-bank.

Variables

Interest rate

good time

(2007:q2)

(I)

Interest rate

bad time

(2010:q1)

(II)

Log Loans

good time

(2007:q2)

(III)

Log Loans

bad time

(2010:q1)

(IV)

T-Bank -0.0896*** 0.1086*** -0.1504*** -0.2067***

(0.0201) (0.0243) (0.0121) (0.0116)

Main -0.0969*** -0.1705*** 1.1652*** 0.8594***

(0.0232) (0.0281) (0.0130) (0.0130)

Main*T-Bank -0.0080 -0.0233 0.0325 0.0125

(0.0301) (0.0361) (0.0366) (0.0164)

Bank fixed effects yes yes yes yes

Firm fixed effects yes yes yes yes

Number of obs. 184,859 184,859 184,859 184,859

Adjusted R-squared 0.529 0.586 0.585 0.570

Notes: The models in column (I) and (III) are estimated in 2007:q2; those in columns (II) and (IV) in

2010:q1. The dummy T-Bank takes the value of 1 if the loan is granted by a transactional bank. The

coefficients represent the difference relative to relationship banking (R-banks). The dummy Main is

equal to one if that bank grants the highest share of lending to that firm. Parameter estimates are

reported with robust standard errors in brackets (cluster at individual firm level). The symbols *, **,

and *** represent significance levels of 10%, 5%, and 1% respectively. Coefficients for fixed effects

are not reported.

61

Table C3 Effect of Bank-firm relationship on the marginal probability of a firms

default. Changing relationship lending definition from province to region.

Dependent variable: P(default

k

=1)

(I)

Baseline

equation

(II)

Firm specific

characteristics

(III)

Alternative

Weight

Coef. Sig. Coef. Sig. Coef. Sig.

T-share (in value) 0.0024 *** 0.0024 ***

(0.0007) (0.0007)

T-share (number of banks) 0.0034 ***

(0.0007)

(0.0004) (0.0004)

LTD -0.0002 -0.0002

(0.0018) (0.0018)

Small firm -0.0020 -0.0018

(0.0034) (0.0035)

CREDIT_HISTORY -0.0001 ** -0.0002 **

(0.0000) (0.0000)

Bank fixed effects Yes Yes Yes

Industry-province dummies Yes Yes Yes

Number of obs. 72,489 72,489 72,489

Pseudo R

2

0.0612 0.1004 0.1003

The models estimate the marginal probability for a firm k to go into default in the period 2008:q3-

2010:q1. All explanatory variables are evaluated at 2008:q2, prior Lehman's default. The variable

T- Share indicates the proportion of loans that firm k has borrowed from a transactional bank. We

report the share both in loan value and in terms of number of T-banks. Parameter estimates are

reported with robust standard errors in brackets (cluster at individual bank level). The symbols *,

**, and *** represent significance levels of 10%, 5%, and 1% respectively. Coefficients for

industry-province dummies and bank fixed effects are not reported.

62

Table C4 T-banking and R-banking in good times and bad times. Changing

relationship lending definition from province to region.

Variables

Interest rate

good time

(2007:q2)

(I)

Interest rate

bad time

(2010:q1)

(II)

Log Loans

good time

(2007:q2)

(III)

Log Loans

bad time

(2010:q1)

(IV)

T-Bank -0.0748*** 0.1038*** -0.2428*** -0.256***

(0.0182) (0.0217) (0.0123) (0.0110)

Bank fixed effects yes yes yes yes

Firm fixed effects yes yes yes yes

Number of obs. 184,859 184,859 184,859 184,859

Adjusted R-squared 0.529 0.585 0.426 0.472

Notes: The models in column (I) and (III) are estimated in 2007:q2; those in columns (II) and (IV) in

2010:q1. The dummy T-Bank takes the value of 1 if the loan is granted by a transactional bank. The

coefficients represent the difference relative to relationship banking (R-banks). Parameter estimates

are reported with robust standard errors in brackets (cluster at individual firm level). The symbols *,

**, and *** represent significance levels of 10%, 5%, and 1% respectively. Coefficients for fixed

effects are not reported.

63

Table C5 Effect of Bank-firm relationship on the marginal probability of a firms

default. All foreign banks subsidiaries are T-banks.

Dependent variable: P(default

k

=1)

(I)

Baseline

equation

(II)

Firm specific

characteristics

(III)

Alternative

Weight

Coef. Sig. Coef. Sig. Coef. Sig.

T-share (in value) 0.0031 *** 0.0027 ***

(0.0009) (0.0007)

T-share (number of banks) 0.0027 ***

(0.0007)

(0.0004) (0.0004)

LTD -0.0002 -0.0002

(0.0018) (0.0018)

Small firm -0.0021 -0.0021

(0.0034) (0.0034)

CREDIT_HISTORY -0.0002 ** -0.0002 **

(0.0000) (0.0000)

Bank fixed effects Yes Yes Yes

Industry-province dummies Yes Yes Yes

Number of obs. 72,489 72,489 72,489

Pseudo R

2

0.0600 0.0994 0.0994

The models estimate the marginal probability for a firm k to go into default in the period 2008:q3-

2010:q1. All explanatory variables are evaluated at 2008:q2, prior Lehman's default. The variable

T- Share indicates the proportion of loans that firm k has borrowed from a transactional bank. We

report the share both in loan value and in terms of number of T-banks. Parameter estimates are

reported with robust standard errors in brackets (cluster at individual bank level). The symbols *,

**, and *** represent significance levels of 10%, 5%, and 1% respectively. Coefficients for

industry-province dummies and bank fixed effects are not reported.

64

Table C6 T-banking and R-banking in good times and bad times. All foreign

banks subsidiaries are T-banks.

Variables

Interest rate

good time

(2007:q2)

(I)

Interest rate

bad time

(2010:q1)

(II)

Log Loans

good time

(2007:q2)

(III)

Log Loans

bad time

(2010:q1)

(IV)

T-Bank -0.0844*** 0.1030*** -0.2737*** -0.2970***

(0.0180) (0.0218) (0.0128) (0.0115)

Bank fixed effects yes yes yes yes

Firm fixed effects yes yes yes yes

Number of obs. 184,859 184,859 184,859 184,859

Adjusted R-squared 0.529 0.585 0.426 0.473

Notes: The models in column (I) and (III) are estimated in 2007:q2; those in columns (II) and (IV) in

2010:q1. The dummy T-Bank takes the value of 1 if the loan is granted by a transactional bank. The

coefficients represent the difference relative to relationship banking (R-banks). Parameter estimates

are reported with robust standard errors in brackets (cluster at individual firm level). The symbols *,

**, and *** represent significance levels of 10%, 5%, and 1% respectively. Coefficients for fixed

effects are not reported.

65

Table C7 Effect of Bank-firm relationship on the marginal probability of a firms

default. New Firms.

Dependent variable: P(default

k

=1)

(I)

Baseline

equation

(II)

Firm specific

characteristics

(III)

Alternative

Weight

Coef. Sig. Coef. Sig. Coef. Sig.

T-share (in value) 0.0120 ** 0.0073 **

(0.0054) (0.0035)

T-share (number of banks) 0.0067 **

(0.0033)

0.0036 0.0036

(0.0024) (0.0024)

LTD -0.0018 -0.0018

(0.0073) (0.0073)

Small firm 0.0070 0.0070

(0.0025) (0.0025)

CREDIT_HISTORY 0.0033 0.0033

(0.0035) (0.0035)

Bank fixed effects Yes Yes Yes

Industry-province dummies Yes Yes Yes

Number of obs. 5,866 5,866 5,866

Pseudo R

2

0.0596 0.1470 0.1470

The models estimate the marginal probability for a firm k to go into default in the period 2008:q3-

2010:q1. All explanatory variables are evaluated at 2008:q2, prior Lehman's default. The variable

T- Share indicates the proportion of loans that firm k has borrowed from a transactional bank. We

report the share both in loan value and in terms of number of T-banks. Parameter estimates are

reported with robust standard errors in brackets (cluster at individual bank level). The symbols *,

**, and *** represent significance levels of 10%, 5%, and 1% respectively. Coefficients for

industry-province dummies and bank fixed effects are not reported.

66

Table C8 T-banking and R-banking in good times and bad times. New Firms.

Variables

Interest rate

good time

(2007:q2)

(I)

Interest rate

bad time

(2010:q1)

(II)

Log Loans

good time

(2007:q2)

(III)

Log Loans

bad time

(2010:q1)

(IV)

T-Bank -0.0844*** 0.1030*** -0.2737*** -0.2970***

(0.0180) (0.0218) (0.0128) (0.0115)

Bank fixed effects yes yes yes yes

Firm fixed effects yes yes yes yes

Number of obs. 5,866 5,866 5,866 5,866

Adjusted R-squared 0.529 0.585 0.426 0.473

Notes: The models in column (I) and (III) are estimated in 2007:q2; those in columns (II) and (IV) in

2010:q1. The dummy T-Bank takes the value of 1 if the loan is granted by a transactional bank. The

coefficients represent the difference relative to relationship banking (R-banks). Parameter estimates

are reported with robust standard errors in brackets (cluster at individual firm level). The symbols *,

**, and *** represent significance levels of 10%, 5%, and 1% respectively. Coefficients for fixed

effects are not reported.

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